Update: Aflac sales slow ‘significantly’ in Japan, but second-quarter operating profit still up slightly to $759 million

CEO Dan Amos forecasts improvement with new medical product, contract to sell policies in 20,000 Japan post offices

tadams@ledger-enquirer.comJuly 30, 2013 

Slowing sales in Japan — which Aflac management expected would occur — did not stop the company from posting a slight increase in its operating profit in the second quarter of 2013.

The supplemental health and life insurer, headquartered in Columbus, reported operating earnings of $759 million in the April-June period, up a half-percent from $755 in the same quarter a year ago.

The results released Tuesday translate to earnings per share of $1.62. That’s better than the $1.51 per share that Wall Street analysts surveyed by Thomson Financial had been expecting.

Aflac Chairman and Chief Executive Officer Dan Amos, in a statement, called the results “strong” considering a weaker yen “masked” the firm’s overall performance.

“As anticipated, Aflac Japan’s overall sales were down significantly in the second quarter,” said Amos, explaining that an interest-rate sensitive life insurance product called “WAYS” had taken a hit due to lower rates in the Asian nation, along with banks selling other investment items.

“Keep in mind, however, our sales target and focus is centered around the sale of Aflac Japan’s third-sector products, including cancer and medical,” the CEO said. “While third-sector sales were down in the second quarter as expected, we continue to believe consumer response to our third-sector products will be strong in the second half of 2013, particularly the fourth quarter, in large part due to the new medical product we’ll be introducing in August.”

Robin Wilkey, senior vice president of investor relations, said the new product will cover expenses connected to hospital stays and surgeries, including outpatient procedures.

“It is paid directly to the consumer,” she said. “They can use it for whatever they want to use it for.”

Amos said third-sector cancer and medical policy sales in Japan will range from flat to up 5 percent for all of 2013. He also mentioned last week’s signing of an expanded agreement with Japan Post Group, which will give Aflac access to 20,000 post offices where its products — a cancer policy in particular — will be sold. Japan Post Insurance will also peddle Aflac policies through its 79 “Kampo” offices.

“The most important message here is that this deal is based on mutual agreement — it is a win-win for Aflac and Japan Post Group,” Amos said. “Basically, this business model will lead to improved profitability for both companies.”

Wilkey called the deal “huge” and a “game changer” for Aflac sales in Japan, although she declined to go into much more detail, including how fast sales will ramp up and pay off for the company.

“We just inked this agreement,” she said. “There has to be training done and other stuff. So there will be a gradual rollout of selling the insurance.”

The second-quarter operating profit reported Tuesday by Aflac came on total revenue of $6 billion, which is 2.4 percent higher than the first three months of 2012.

Through the first half of this year, operating earnings were $1.5 billion, down 1.3 percent from $1.6 billion a year ago. That was on total revenue of $12.3 billion, nearly 1 percent higher than $12.1 billion in the January-June timeframe last year.

The weaker yen took a toll on the numbers, Aflac said. For instance, excluding the yen’s impact, overall second-quarter operating earnings would have been up more than 14 percent, instead of the half-percent. For the first half of the year, they would have been nearly 10 percent higher instead of the 1.3 percent dip.

Looking specifically at the company’s performance in Japan, total revenue was up 10 percent, pretax operating earnings were 20 percent higher and premium income gained nearly 9 percent. That’s in Japanese yen. But when converting that to dollars, those categories were down nearly 11 percent, 2.5 percent and about 12 percent, respectively. New annualized premium sales, meanwhile, were off 43 percent. The WAYS (life insurance) policy dropoff was the driver there.

“We thought the sales of that WAYS product would be down at least 40 to 60 percent,” Wilkey said. “The steep decline was expected.” In the United States, total revenue, operating earnings, premium income, net investment income and new annualized premium sales all were higher in the quarter.

But the company said the going has been tough with the U.S. economy remaining painfully sluggish and major health-care reform initiatives on the horizon, the latter creating anxiety and uncertainty among small businesses. That sector is about 90 percent of sales in the U.S market for Japan.

“Some employers are saying: I don’t even understand how health-care reform is going to impact me. And until I understand that, I don’t even want to think about this,” Wilkey said of the response Aflac sales agents are getting from small businesses with 100 or fewer employees.

The Columbus company said it repurchased about 2.3 million shares of its stock from investors, worth about $129 million. The firm’s target for this year is buying back $600 million worth of stock, with $600 million to $900 million more in 2014.

Aflac is in its 30th consecutive year of cash dividend increases. It will pay a third-quarter dividend of 35 cents per share to those owning its stock as of August. 21. The dividend is payable Sept. 3.

Amos said the goal this year is to grow operating earnings 4 percent to 7 percent. Full-year operating earnings should be in the range of $5.83 to $6.37 per diluted share.

“We plan on increasing spending in the second half of 2013,” he said. “In Japan, we will increase expenditures on advertising and promotion for our new product launch in August. In the United States, we anticipate increased costs associated with initiatives related to health-care reform.”

Aflac released its earnings report after the stock market’s close Tuesday. Shares of its stock slipped 16 cents, or 0.26 percent, to $60.85 in trading on the New York Stock Exchange. The stock’s 52-week trading range is $42.39 to $61.47 per share.

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