Aflac Reports 4Q 2017 Net Earnings of $2.4B
Thursday, February 1st, 2018
Aflac Incorporated reported its fourth quarter results.
Total revenues were $5.4 billion during the fourth quarter of 2017, compared with $6.0 billion in the fourth quarter of 2016. Net earnings were $2.4 billion, or $5.95 per diluted share, compared with $751 million, or $1.84 per diluted share a year ago. The increase in net earnings in the fourth quarter of 2017 reflects an estimated $1.7 billion benefit as a result of the recent U.S. Tax Cut and Jobs Act ("Tax Reform"). This estimated impact of Tax Reform may be adjusted for the current and future periods, possibly materially, due to, among other things, further refinement of the company's calculations, changes in interpretations and assumptions the company has made, tax guidance that may be issued and actions the company may take as a result of Tax Reform.
Net earnings in the fourth quarter of 2017 included pretax net realized investment gains of $58 million, or $0.15 per diluted share on a pretax basis, compared with pretax net gains of $386 million, or $0.94 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 fourth quarter amounted to $42 million, reflecting pretax net realized investment losses from securities transactions of $32 million, as well as pretax realized investment losses from impairments and the change in loan loss reserves of $10 million. Pretax net realized investment gains from certain derivative and foreign currency activities in the quarter were $100 million. Net earnings also included a pretax charge of $18 million, reflecting Japan branch conversion costs and a $13 million pretax charge from the early extinguishment of debt. The income tax expense on non-operating items in the quarter was $9 million. Additionally, net earnings in the quarter reflect a tax reform adjustment benefit of $1.7 billion, or $4.30 per diluted share.
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 (AOCI), 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. A significant portion of the company's business is conducted in yen and never converted into dollars but translated into dollars for U.S. GAAP reporting purposes, which results in foreign currency impact to earnings, cash flows and book value on a U.S. GAAP basis. Because 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 fourth quarter of 2017 was 112.98, or 3.4% weaker than the average rate of 109.10 in the fourth quarter of 2016. For the full year, the average exchange rate was 112.16, or 3.1% weaker than the rate of 108.70 a year ago. Aflac Japan's growth rates in dollar terms for the fourth quarter and full year were suppressed as a result of the weaker yen/dollar exchange rate.
Operating earnings in the fourth quarter were $633 million, compared with $589 million in the fourth quarter of 2016. Operating earnings per diluted share increased 11.1% to $1.60 per diluted share in the quarter. The weaker yen/dollar exchange rate decreased operating earnings per diluted share by $0.03 for the fourth quarter. Excluding the impact of the weaker yen, operating earnings per diluted share increased 13.2% to $1.63.
For the full year, total revenues were down 4.0% to $21.7 billion, compared with $22.6 billion for the full year of 2016. Net earnings were $4.4 billion, or $10.96 per diluted share, compared with $2.7 billion, or $6.42 per diluted share, for the full year of 2016, primarily reflecting the impact of tax reform. Operating earnings for the full year were $2.7 billion, or $6.81 per diluted share, compared with $2.7 billion, or $6.50 per diluted share, in 2016. Excluding the negative impact of $0.10 per share from the weaker yen, operating earnings per diluted share increased 6.3% for the full year of 2017.
Total investments and cash at the end of December 2017 were $123.7 billion, compared with $116.4 billion at December 31, 2016.
In the fourth quarter, Aflac repurchased $331 million, or 3.9 million of its common shares. For the full year, the company purchased $1.35 billion, or 17.8 million of its common shares. At the end of December, the company had 49.0 million shares available for purchase under its share repurchase authorizations.
Shareholders' equity was $24.4 billion, or $62.40 per share, at December 31, 2017, compared with $20.5 billion, or $50.47 per share, at December 31, 2016. This reflects a tax reform adjustment benefit of $1.7 billion, or $4.35 per share. Shareholders' equity at the end of the fourth quarter included a net unrealized gain on investment securities and derivatives of $5.9 billion, compared with a net unrealized gain of $4.8 billion at December 31, 2016. Shareholders' equity at the end of the fourth quarter also included unrealized foreign currency translation loss of $1.8 billion, compared with an unrealized foreign currency translation loss of $2.0 billion at December 31, 2016. The annualized return on average shareholders' equity in the fourth quarter was 40.6%, or 11.7% excluding the tax reform adjustment of $1.7 billion.
Shareholders' equity excluding AOCI was $20.3 billion, or $52.09 per share at December 31, 2017, compared with $17.9 billion, or $43.99 per share, at December 31, 2016. On an operating basis, the annualized return on average shareholders' equity excluding the impact of foreign currency in the fourth quarter was 13.3%, or 13.9% excluding the tax reform adjustment of $1.7 billion.
In yen terms, Aflac Japan's premium income, net of reinsurance, decreased 3.3% in the fourth quarter to ¥354.2 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. Net investment income, net of amortized hedge costs, increased 2.4% to ¥63.5 billion primarily due to the foreign currency impact of U.S. dollar-denominated investments. Amortized hedge costs on the U.S. dollar investment portfolio totaled $60 million pretax quarter to date, compared with $64 million in the previous year. Total revenues were down 2.5% to ¥418.8 billion in the fourth quarter. Pretax operating earnings in yen for the quarter increased 8.8% on a reported basis and 7.5% on a currency-neutral basis. The pretax operating profit margin for the Japan segment was 20.2%, compared with 18.1% in 2016, primarily reflecting the impact of the prior-year ¥6 billion reserve adjustment on a closed block of business, as well as the mix of first and third sector products.
For the full year, premium income in yen was ¥1.4 trillion, or 2.7% lower than a year ago. Net investment income, net of amortized hedge costs, decreased 2.0% to ¥251.8 billion. Total revenues in yen were down 2.5% to ¥1.7 trillion. Pretax operating earnings were ¥343.6 billion, or 0.6% higher than a year ago.
Aflac Japan's growth rates in dollar terms for the fourth quarter were suppressed as a result of the weaker yen/dollar exchange rate. Premium income, net of reinsurance, decreased 6.7% to $3.1 billion in the fourth quarter. Net investment income, net of amortized hedge costs, decreased 1.1% to $559 million. Total revenues declined by 5.9% to $3.7 billion. Pretax operating earnings increased 5.1% to $747 million.
For the full year, premium income in dollars was $12.8 billion, or 5.8% lower than a year ago. Net investment income, net of amortized hedge costs, decreased 5.6% to $2.2 billion. Total revenues were down 5.8% to $15.0 billion. Pretax operating earnings were $3.1 billion, or 3.0% lower than a year ago.
In the fourth quarter, total new annualized premium sales decreased 8.3% to ¥23.6 billion, or $209 million. Third sector sales, which include cancer, medical and income support products, increased 1.3% to ¥22.0 billion in the quarter. Total first sector sales, which include products such as WAYS and child endowment, were down 59.4% in the quarter, reflecting the company's actions to reduce the sale of first sector savings products that are more interest-sensitive.
For the full year, new annualized premium sales declined 16.6% to ¥94.9 billion, or $846 million. Third sector sales increased 4.1% for the year.
Aflac U.S. premium income increased 2.2% to $1.4 billion in the fourth quarter. Net investment income was up 2.8% to $182 million. Total revenues increased 2.1% to $1.6 billion. Pretax operating earnings in the quarter were $288 million, an increase of 9.9%, primarily reflecting a lower year-over-year expense ratio. The pretax operating profit margin for the U.S. segment was 18.3%, compared with 17.0% a year ago.
For the full year, premium income increased 2.0% to $5.6 billion, and net investment income increased 2.6% to $721 million. Total revenues were up 2.0% to $6.3 billion. Pretax operating earnings were $1.2 billion, 3.1% higher than a year ago. The pretax operating profit margin for the U.S. segment was 19.8%.
Aflac U.S. total new annualized premium sales increased 6.7% in the quarter to $515 million. For the full year, total new sales were up 4.7% to $1.6 billion.
The board of directors announced a 15.6% increase in the quarterly cash dividend, effective with the first quarter. The first quarter dividend of $0.52 per share is payable on March 1, 2018, to shareholders of record at the close of business on February 21, 2018.
Commenting on the company's results, Chairman and Chief Executive Officer Daniel P. Amos stated: "We are pleased with the company's overall performance for the year. Aflac Japan, our largest earnings contributor, generated strong financial and third sector sales results for the year. Looking ahead to 2018, sales of third sector products face challenging comparisons, especially in the early part of the year due to the conversion of the Japan branch. However, we expect to see improvements in third sector sales in the second half of the year. As we said during our outlook call last month, in 2018, we anticipate that third sector earned premium will continue its steady growth in the 2% to 3% range, reflecting Aflac's stable sales and high persistency in Japan.
"Turning to our U.S. operations, we are pleased with the sales results, financial performance and strong profitability of Aflac U.S. in 2017. Our sales results reflect our focus on the growth strategy we implemented in both our career and broker channels. As we said on last month's outlook call, we anticipate 2018 growth in earned premium to be around 2% to 3% and new annualized premium sales growth of 3% to 5%.
"We remain committed to maintaining strong capital ratios on behalf of our policyholders and balance this financial strength with a focus on increasing the dividend, repurchasing shares and reinvesting in our business. The board of directors' action to increase the dividend by 15.6% reflects overall strength in the company's capital position, along with an outlook for stable growth in earnings and deployable capital generation. This accelerated resetting of the dividend as we enter 2018 demonstrates our commitment to rewarding our shareholders. Additionally, we expect share repurchase will be in the range of $1.1 to $1.4 billion in 2018, which assumes stable capital conditions and the absence of compelling alternatives. At the same time, we recognize that prudent investment in our platform is also critical to our growth strategy and driving efficiencies that ultimately will impact the bottom line.
"We are pleased that the U.S. tax reforms enacted in December 2017 provided Aflac with an opportunity to accelerate and increase our investments in initiatives that reflect our company values and objectives. As we communicated, we expect to increase overall investment in the U.S. by approximately $250 million over three to five years. These strategic investments target continued growth in the company's U.S. operation, expanded employee benefits and training programs as well as investing in technology and digital businesses.
"As we look to 2018 and take into account U.S. tax reform, our objective is to produce stable operating earnings per diluted share of $7.45 to $7.75, assuming the 2017 weighted-average exchange rate of 112.16 yen to the dollar. As always, we are working very hard to achieve our earnings-per-share objective while also ensuring we deliver on our promise to policyholders."