Aflac Profit Up 30% to $713 million in Q2
Friday, July 28th, 2017
Aflac Incorporated reported its second quarter results.
Total revenues were $5.4 billion during the second quarter of 2017, which is flat compared with the second quarter of 2016. Net earnings were $713 million, or $1.79 per diluted share, compared with $548 million, or $1.32 per share a year ago. Net earnings in the second quarter of 2017 primarily reflect lower losses related to certain derivatives and foreign currency activities, compared with second quarter 2016.
Net earnings in the second quarter of 2017 included pretax net realized investment losses of $19 million, or $.05 per diluted share on a pretax basis, compared with pretax net losses of $208 million, or $.51 per diluted share a year ago. Beginning in the first quarter of 2017, the company began reporting amortized hedge costs associated with certain U.S. dollar investments in the Japan portfolio as part of operating earnings. Pretax net realized losses from securities transactions and impairments for the second quarter amounted to $3 million and were composed of pretax net realized investment gains from securities transactions of $5 million, and pretax realized investment losses from impairments and change in loan loss reserves of $8 million. Pretax net realized investment losses from certain derivative and foreign currency activities in the quarter were $16 million. Net earnings also included a pretax charge of $8 million, reflecting Japan branch conversion costs. The income tax benefit on non-operating items in the quarter was $10 million.
The following discussion includes references to Aflac's non-U.S. GAAP performance measures, operating earnings, operating earnings per diluted share, operating return on equity, amortized hedge costs, and adjusted book value. These measures are not calculated in accordance with U.S. GAAP. The measures exclude items that the company believes may obscure the underlying fundamentals and trends in insurance operations because they tend to be driven by general economic conditions and events or related to infrequent activities not directly associated with insurance operations. Management uses operating earnings, operating earnings per diluted share, and operating return on equity to evaluate the financial performance of Aflac's insurance operations on a consolidated basis and believes that a presentation of these measures is vitally important to an understanding of the underlying profitability drivers and trends of Aflac's insurance business. The company believes that amortized hedge costs, which are a component of operating earnings, measure the periodic currency risk management costs associated with hedging a portion of Aflac Japan's U.S. dollar-denominated investments and are an important component of net investment income. The company considers adjusted book value important as it excludes components of shareholders' equity that fluctuate due to market movements that are outside management's control. Definitions of the company's non-GAAP measures and reconciliations to the most comparable U.S. GAAP measures are provided in the schedules accompanying this release.
Due to the size of Aflac Japan, where the functional currency is the Japanese yen, fluctuations in the yen/dollar exchange rate can have a significant effect on reported results. In periods when the yen weakens, translating yen into dollars results in fewer dollars being reported. When the yen strengthens, translating yen into dollars results in more dollars being reported. Consequently, yen weakening has the effect of suppressing current period results in relation to the comparable prior period, while yen strengthening has the effect of magnifying current period results in relation to the comparable prior period. As a result, the company views foreign currency translation as a financial reporting issue for Aflac rather than an economic event to the company or shareholders. Because a significant portion of the company's business is conducted in Japan and foreign exchange rates are outside of management's control, Aflac believes it is important to understand the impact of translating Japanese yen into U.S. dollars. Operating earnings, operating earnings per diluted share, and operating return on equity, all excluding current period foreign currency impact are computed using the average yen/dollar exchange rate for the comparable prior year period, which eliminates dollar based fluctuations driven solely from currency rate changes.
The average yen/dollar exchange rate in the second quarter of 2017 was 111.10, or 2.5% weaker than the average rate of 108.28 in the second quarter of 2016. For the first six months, the average exchange rate was 112.31, or .4% weaker than the rate of 111.82 a year ago. Aflac Japan's growth rates in dollar terms for the second quarter and first six months were suppressed as a result of the weaker yen/dollar exchange rate.
Operating earnings in the second quarter were $731 million, compared with $683 million in the second quarter of 2016. Operating earnings per diluted share increased 10.9% to $1.83 in the quarter, compared with $1.65 a year ago. The weaker yen/dollar exchange rate decreased operating earnings per diluted share by $.02 for the second quarter. Excluding the impact of the weaker yen, operating earnings per diluted share increased 12.1% to $1.85. The increase in operating earnings primarily reflects improved benefit ratios in both Japan and the U.S. Additionally, the company recognized a tax benefit of $22.5 million, or approximately $.05 per diluted share, resulting from favorable resolution of items related to tax year closings.
For the first six months of 2017, total revenues were down 1.4% to $10.7 billion, compared with $10.9 billion in the first half of 2016. Net earnings were $1.3 billion, or $3.25 per diluted share, compared with $1.3 billion, or $3.06 per diluted share, for the first six months of 2016. Operating earnings for the first half of 2017 were $1.4 billion, or $3.50 per diluted share, compared with $1.4 billion, or $3.32 per diluted share, in 2016. Excluding the negative impact of $.01 per share from the weaker yen, operating earnings per diluted share increased 5.7% for the first six months of 2017.
Total investments and cash at the end of June 2017 were $121.9 billion, compared with $120.5 billion at March 31, 2017.
In the second quarter, Aflac repurchased $200 million, or 2.7 million of its common shares. For the first half of the year, the company purchased $800 million, or 11.2 million of its common shares. At the end of June, the company had 15.6 million shares available for purchase under its share repurchase authorizations.
Shareholders' equity was $21.5 billion, or $54.30 per share, at June 30, 2017, compared with $22.6 billion, or $54.98 per share, at June 30, 2016. Shareholders' equity at the end of the second quarter included a net unrealized gain on investment securities and derivatives of $5.2 billion, compared with a net unrealized gain of $6.4 billion at June 30, 2016. The annualized return on average shareholders' equity in the second quarter was 13.6%.
Excluding accumulated other comprehensive income (AOCI), shareholders' equity was $18.1 billion, or $45.71 per share at June 30, 2017, compared with $17.1 billion, or $41.74 per share, at June 30, 2016. On an operating basis, excluding AOCI, the annualized return on average shareholders' equity on a currency-neutral basis for the second quarter was 16.5% and for the first half of the year was 15.7%.
In yen terms, Aflac Japan's premium income, net of reinsurance, decreased 2.7% in the second quarter to ¥358.0 billion, with growth in third sector premium more than offset by an anticipated reduction in first sector premium due to savings products reaching premium paid-up status in the quarter. Net investment income, net of amortized hedge costs, declined 4.7%, primarily due to lower reinvestment rates and increased amortized hedge costs. Amortized hedge costs on the U.S. dollar investment portfolio totaled $56 million quarter to date, as compared to $37 million in the previous year. Total revenues were down 3.0% to ¥421.2 billion in the second quarter. Pretax operating earnings in yen for the quarter increased 1.8% on a reported basis and 1.0% on a currency-neutral basis. The pretax operating profit margin for the Japan segment was 20.9%, compared with 19.9% in the prior year.
For the first six months, premium income in yen was ¥720.9 billion, or 1.9% lower than a year ago. Net investment income, net of amortized hedge costs, decreased 5.5% to ¥125.8 billion. Total revenues in yen were down 2.4% to ¥848.9 billion. Pretax operating earnings were ¥175.7 billion, or 2.0% lower than a year ago.
Aflac Japan's growth rates in dollar terms for the second quarter were suppressed as a result of the weaker yen/dollar exchange rate. Premium income, net of reinsurance, decreased 5.3% to $3.2 billion in the second quarter. Net investment income, net of amortized hedge costs, decreased 7.9% to $557 million. Total revenues declined by 5.7% to $3.8 billion. Pretax operating earnings declined 1.4% to $791 million.
For the first half of the year, premium income in dollars was $6.4 billion, or 2.5% lower than a year ago. Net investment income, net of amortized hedge costs, decreased 6.7% to $1.1 billion. Total revenues were down 3.1% to $7.6 billion. Pretax operating earnings were $1.6 billion, or 3.0% lower than a year ago.
In the second quarter, total new annualized premium sales decreased 16.0% to ¥25.4 billion, or $229 million. Third sector sales, which include cancer, medical and income support products increased 5.8% to ¥23.7 billion in the quarter. Total first sector sales, which include products such as WAYS and child endowment, were down 77.9% in the quarter, reflecting the company's actions to reduce the sale of first sector savings products that are more interest-sensitive.
For the first six months of the year, new annualized premium sales declined 22.7% to ¥47.5 billion, or $423 million. Third sector sales increased 6.6% in the first half of the year.
Aflac U.S. premium income increased 1.9% to $1.4 billion in the second quarter. Net investment income was up 2.3% to $180 million. Total revenues increased 2.1% to $1.6 billion. The pretax operating profit margin for the U.S. segment was 21.0%, compared with 19.0% a year ago. Reflecting improved persistency and a favorable benefit ratio, pretax operating earnings in the quarter were $330 million, an increase of 13.4%.
For the first six months, total revenues were up 1.8% to $3.1 billion and premium income rose 1.8% to $2.8 billion. Net investment income increased 2.3% to $358 million. Pretax operating earnings were $640 million, 2.7% higher than a year ago.
Aflac U.S. total new annualized premium sales increased 2.4% in the quarter to $356 million. Additionally, persistency in the quarter was 77.6%, compared with 76.7% a year ago. For the first half of the year, total new sales were up 2.1% to $689 million.
The board of directors declared the third quarter cash dividend. The third quarter dividend of $.43 per share is payable on September 1, 2017, to shareholders of record at the close of business on August 23, 2017.
Commenting on the company's results, Chairman and Chief Executive Officer Daniel P. Amos stated: "We are pleased that our second quarter financial results in both Japan and the United States reflected solid performance and advanced our progress toward achieving the company's objectives for 2017.
"Aflac Japan, our largest earnings contributor, generated strong financial results both in the quarter and for the first half of the year. In yen terms, results on an operating basis were better than expected for the quarter, resulting primarily from improved benefit ratios. Additionally, our operation in Japan continued to produce strong third sector sales results. As we've communicated, we continue to believe the long-term compound annual growth rate for third sector product sales will be in the range of 4% to 6%.
"Turning to our U.S. operations, we are pleased with the financial performance and continued strength in profitability. Our results on an operating basis reflect improved benefit ratios and ongoing investment in our platform. As we've communicated, we anticipate a long-term compound annual growth rate of 3% to 5% in new annualized premium sales. As we look ahead, we continue to believe the strategy for growth we implemented in both our career and broker channels is the right one, and we will continue to make tactical adjustments to meet our long-term growth objectives.
"We remain committed to maintaining strong capital ratios on behalf of our policyholders and all stakeholders. We balance this financial strength with a focus on increasing the dividend, repurchasing shares and reinvesting in our business. We continue to believe our financial strength in Japan positions us to repatriate in the range of ¥120 to ¥140 billion to the U.S. for the calendar year 2017, assuming capital conditions remain stable. We continue to anticipate that we'll repurchase in the range of $1.3 to $1.5 billion of our shares in 2017, which also assumes stable capital conditions and the absence of compelling alternatives.
"In the second half of the year, as we continue to focus on initiatives designed to drive future growth, our expectation is to increase spending, particularly related to IT and promotional expenditures. However, I want to reiterate our 2017 earnings guidance. Our six month results put us on track to produce stable operating earnings per diluted share of $6.40 to $6.65, assuming the weighted-average exchange rate in 2016 of 108.70 yen to the dollar. If the yen averages 105 to 115 to the dollar for the third quarter, we would expect operating earnings, a non-U.S. GAAP measure, to be approximately $1.51 to $1.69 per diluted share in the third quarter. As always, we are working very hard to achieve our earnings-per-share objective while also making sure we deliver on our promise to policyholders."