Aflac Reports $716M Profit, Will Pay 45-cent Cash Dividend
Friday, October 27th, 2017
Aflac Incorporated reported its third quarter results.
Total revenues were $5.5 billion during the third quarter of 2017, compared with $5.7 billion in the third quarter of 2016. Net earnings were $716 million, or $1.80 per diluted share, compared with $629 million, or $1.53 per diluted share a year ago. The increase in net earnings in the third quarter of 2017 primarily reflects realized investment gains compared with third quarter 2016.
Net earnings in the third quarter of 2017 included pretax net realized investment gains of $71 million, or $0.18 per diluted share on a pretax basis, compared with pretax net losses of $130 million, or $0.32 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 gains from securities transactions and impairments for the third quarter amounted to $53 million and were composed of pretax net realized investment gains from securities transactions of $61 million and pretax realized investment losses from impairments and change in loan loss reserves of $8 million. Pretax net realized investment gains from certain derivative and foreign currency activities in the quarter were $18 million. Net earnings also included a pretax charge of $10 million, reflecting Japan branch conversion costs. The income tax expense on non-operating items in the quarter was $21 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 accumulated other comprehensive income, which fluctuates 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 third quarter of 2017 was 111.03, or 7.8% weaker than the average rate of 102.37 in the third quarter of 2016. For the first nine months, the average exchange rate was 111.89, or 3.0% weaker than the rate of 108.58 a year ago. Aflac Japan's growth rates in dollar terms for the third quarter and first nine months were suppressed as a result of the weaker yen/dollar exchange rate.
Operating earnings in the third quarter were $676 million, compared with $713 million in the third quarter of 2016. The decrease in operating earnings primarily reflects the impact of a weaker yen in the quarter. Strong overall margins in the quarter were driven by an improved benefit ratio in Japan and include pretax cancer claim reserve adjustments of $22 million, or ¥2.4 billion. Operating earnings per diluted share decreased 2.3% to $1.70 per diluted share in the quarter, and includes an after-tax benefit from the reserve adjustment of $0.04 per diluted share, compared with $1.74 a year ago. The weaker yen/dollar exchange rate decreased operating earnings per diluted share by $0.07 for the third quarter. Excluding the impact of the weaker yen, operating earnings per diluted share increased 1.7% to $1.77.
For the first nine months of 2017, total revenues were down 2.2% to $16.2 billion, compared with $16.6 billion in the first nine months of 2016. Net earnings were $2.0 billion, or $5.05 per diluted share, compared with $1.9 billion, or $4.59 per diluted share, for the first nine months of 2016. Operating earnings for the first nine months of 2017 were $2.1 billion, or $5.20 per diluted share, compared with $2.1 billion, or $5.06 per diluted share, in 2016. Excluding the negative impact of $0.08 per share from the weaker yen, operating earnings per diluted share increased 4.3% for the first nine months of 2017.
Total investments and cash at the end of September 2017 were $122.5 billion, compared with $121.9 billion at June 30, 2017.
In the third quarter, Aflac repurchased $219 million, or 2.7 million of its common shares. For the first nine months of the year, the company purchased $1.0 billion, or 13.9 million of its common shares. At the end of September, the company had 53.0 million shares available for purchase under its share repurchase authorizations.
Shareholders' equity was $22.0 billion, or $55.80 per share, at September 30, 2017, compared with $22.8 billion, or $55.84 per share, at September 30, 2016. Shareholders' equity at the end of the third quarter included a net unrealized gain on investment securities and derivatives of $5.4 billion, compared with a net unrealized gain of $6.1 billion at September 30, 2016. The annualized return on average shareholders' equity in the third quarter was 13.2%.
Shareholders' equity excluding AOCI was $18.4 billion, or $46.83 per share at September 30, 2017, compared with $17.4 billion, or $42.70 per share, at September 30, 2016. On an operating basis, the annualized return on average shareholders' equity excluding AOCI on a currency-neutral basis for the third quarter was 15.4% and for the first nine months of the year was 15.5%.
In yen terms, Aflac Japan's premium income, net of reinsurance, decreased 3.5% in the third quarter to ¥355.3 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, increased 1.1% to ¥62.5 billion primarily due to the foreign currency impact of U.S. dollar-denominated investments. The increases in net investment income from the weakening yen/strengthening dollar were partially offset by lower re-investment rates and increased amortized hedge costs. Amortized hedge costs on the U.S. dollar investment portfolio totaled $60 million pretax quarter to date, compared with $54 million in the previous year. Total revenues were down 2.8% to ¥419.0 billion in the third quarter. Pretax operating earnings in yen for the quarter decreased 1.3% on a reported basis and 4.4% on a currency-neutral basis. The pretax operating profit margin for the Japan segment was 19.9%, compared with 19.6% in the prior year.
For the first nine months, premium income in yen was ¥1.1 trillion, or 2.4% lower than a year ago. Net investment income, net of amortized hedge costs, decreased 3.4% to ¥188.3 billion. Total revenues in yen were down 2.5% to ¥1.3 trillion. Pretax operating earnings were ¥259.0 billion, or 1.8% lower than a year ago.
Aflac Japan's growth rates in dollar terms for the third quarter were suppressed as a result of the weaker yen/dollar exchange rate. Premium income, net of reinsurance, decreased 11.0% to $3.2 billion in the third quarter. Net investment income, net of amortized hedge costs, decreased 7.6% to $561 million. Total revenues declined by 10.5% to $3.8 billion. Pretax operating earnings declined 9.6% to $748 million.
For the first nine months of the year, premium income in dollars was $9.6 billion, or 5.5% lower than a year ago. Net investment income, net of amortized hedge costs, decreased 7.0% to $1.7 billion. Total revenues were down 5.7% to $11.3 billion. Pretax operating earnings were $2.3 billion, or 5.3% lower than a year ago.
In the third quarter, total new annualized premium sales decreased 10.5% to ¥23.7 billion, or $214 million. Third sector sales, which include cancer, medical and income support products, increased 2.1% to ¥22.1 billion in the quarter. Total first sector sales, which include products such as WAYS and child endowment, were down 66.7% 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 nine months of the year, new annualized premium sales declined 19.0% to ¥71.2 billion, or $637 million. Third sector sales increased 5.0% in the first nine months of the year.
Aflac U.S. premium income increased 2.1% to $1.4 billion in the third quarter. Net investment income was up 2.8% to $181 million. Total revenues increased 2.1% to $1.6 billion. The pretax operating profit margin for the U.S. segment was 20.1%, compared with 20.9% a year ago. Pretax operating earnings in the quarter were $316 million, a decrease of 2.2%, reflecting elevated investment in the platform.
For the first nine months of the year, total revenues were up 1.9% to $4.7 billion and premium income rose 1.9% to $4.2 billion. Net investment income increased 2.5% to $539 million. Pretax operating earnings were $956 million, 1.1% higher than a year ago.
Aflac U.S. total new annualized premium sales increased 7.5% in the quarter to $348 million. Persistency in the quarter was 77.7%, compared with 76.9% a year ago. For the first nine months of the year, total new sales were up 3.8% to $1.0 billion.
The board of directors announced a 4.7% increase in the quarterly cash dividend, effective with the fourth quarter payment. The fourth quarter dividend of $0.45 per share is payable on December 1, 2017, to shareholders of record at the close of business on November 15, 2017.
Commenting on the company's results, Chairman and Chief Executive Officer Daniel P. Amos stated: "We are pleased that our third quarter and year to date financial results in both Japan and the U.S. reflected solid performance and continued 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 the first nine months 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 discussed at our Financial Analysts Briefing, near-term growth rates for third sector products face challenging comparisons, and we continue to target a long-term growth rate in the range of 4% to 6% through 2019.
"Turning to our U.S. operations, we are pleased with our overall performance and continued strength in profitability. I am particularly encouraged by our strong sales results in the third quarter. This success reflects our focus on the growth strategy we implemented in both our career and broker channels. Our results on an operating basis reflect continued strength in benefit ratios and ongoing investment in our platform. We continue to anticipate a long-term growth rate of 3% to 5% in new annualized premium sales through 2019.
"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.
"The board of directors' action to increase the quarterly dividend by 4.7% demonstrates our commitment to rewarding our shareholders. This marks the 35th consecutive year of increasing our cash dividend. Our dividend policy is guided by growth in operating earnings per share along with free cash flow generation and capital quality.
"Having completed the first nine months of the year, I am pleased with the company's overall results. We believe those results, combined with our outlook for the remainder of 2017, well-position Aflac for another year of solid financial performance. We continue to expect increased spending in the fourth quarter in support of initiatives designed to drive future growth. I am extremely pleased that we are upwardly revising our 2017 operating earnings per diluted share outlook from a range of $6.40 to $6.65 to a higher range of $6.75 to $6.95, both of which exclude the impact of the yen. If the yen averages ¥110 to ¥115 to the dollar for the fourth quarter, we would expect operating earnings, a non-GAAP measure, to be approximately $1.42 to $1.66 per diluted share in the fourth quarter, making full-year operating earnings approximately $6.62 to $6.86 per diluted share."