Update: Aflac reports operating earnings of $774 million

Insurer’s first-quarter profit impacted by weaker yen-to-dollar rate

tadams@ledger-enquirer.comApril 29, 2014 

At first glance, Aflac’s first-quarter earnings report, issued Tuesday, had an air of declining performance: Total revenue down 9.1 percent. Net earnings, or profit, 18 percent lower. Net earnings per share down from $1.90 in the same quarter of 2013 to $1.60 in the current three-month period.

But Columbus-based Aflac said those numbers reflect the continuing impact of a weaker yen-to-dollar exchange rate that makes the financial figures appear more dire than they actually are.

Operating earnings, which also take out one-time items such as investment gains and losses, came in just 2 percent lower, with operating earnings per share matching the year-ago number of $1.69.

“We are pleased with our overall financial results in the first quarter of 2014,” Aflac Chairman and Chief Executive Officer Dan Amos said in a statement. “Aflac Japan, our largest earnings contributor, generated strong financial results for the quarter.”

As for Aflac U.S., his words were more pointed: “From a financial perspective, Aflac U.S. continued to perform well in the first quarter, although we remain disappointed with our sales growth.”

The supplemental health and life insurer — which now has 94-percent brand recognition, largely because of its Aflac duck ad campaign — reported operating earnings of $774 million, down from $790 million in the January-March period a year ago. The operating earnings per share of $1.69 were better than the consensus $1.58 per share that Wall Street analysts had been anticipating.

Total revenue was $5.6 billion, off 9.1 percent from $6.2 billion in the quarter a year ago. That contributed to net earnings of $732 million, down 18 percent from $892 million a year ago.

One bellwether number that gets most shareholders excited: The company said it will pay a quarterly dividend of 37 cents per share, up from 35 cents a year ago. It also is the 31st straight quarter that Aflac has increased its dividend.

“I want to reiterate that our objective for 2014 is to increase operating earnings per diluted share 2 percent to 5 percent on a currency neutral basis,” Amos said. “We are pleased that our first quarter earnings per share were above our annual target.”

The earnings this year are expected to get a boost from share repurchases that make remaining stocks more valuable to investors. In the first quarter, the company bought back 6.5 million shares of common stock valued at $415 million. It has nearly 43 million shares of stock remaining under the current stock authorization by its board of directors.

However, the CEO said Aflac will be “challenged by several headwinds” later in the year, including additional spending and higher benefit ratios. Money will be spent on software and consultants to upgrade its various fulfillment systems, including enrollment and billing.

If the forecast modeling works out, Aflac should post operating earnings between $1.54 to $1.68 per share in the second quarter of this year, Amos said. For all of 2014, operating earnings would come in between $6.06 and $6.40 per share.

The company had previously communicated to the stock market analysts that new annualized premium sales in Japan were expected to be down significantly in the first quarter, said Robin Wilkey, Aflac’s senior vice president of Investor and Rating Agency Relations.

She said “first-sector products” like life insurance policies — which are less profitable — dropped nearly 68 percent. Instead, the company is working to ramp up “third-sector sales” that include the more profitable cancer and medical policies. Aflac pays policyholders each day they are hospitalized for various illnesses and injuries.

While operating earnings per share, excluding the impact of the yen, did surpass management’s annual target, Wilkey said the company also has tempered analysts’ expectations with the prospect of the extra expenses on the upgrades that will take place later this year. The spending is expected to amount to 12 cents per share for Japan and a penny per share in the U.S.

“So we’re going to say to them, don’t get too happy because we’ll spend more as the year goes along,” Wilkey said.

She also noted the year-over-year decrease in U.S. sales growth was impacted by multiple factors. Uncertainty generated by the U.S. health-care reform was part of it, but bottom-line performance also was an issue.

“Dan will also tell you we have execution issues. We have implemented some changes that we think will help us more towards the latter half of the year,” she said, pointing out performance management targets and a renewed emphasis on recruiting independent sales agents will take place.

She said Amos has directed that the company get back to what made it successful in the first place, particularly in the U.S.

“Dan uses the term blocking and tackling, saying that no matter what type of health insurance you have — whether it’s national health insurance later on or the insurance (consumers have) now — there are gaps in coverage,” she said. “Our products are built to cover gaps in coverage.”

The company’s targets this year are to increase sales in Japan between 2 percent and 7 percent, and for sales in the U.S. to range from flat up to 5 percent. The continued training and rollout of sales by Japan Post, the Asian nation’s postal service, is expected to boost sales in Japan later in the year.

Aflac derives about 80 percent of its annual earnings from Japan, where customers there are more conservative and loyal and tend to stick with an employer for life, said Wilkey. In the U.S., employees change jobs much more often and are less loyal when it comes to retaining insurance policies.

About 90 percent of Aflac’s sales are made to smaller businesses of 100 employees or less. It’s group sales office based in Columbia, S.C., markets to large corporations of more than 1,000 workers.

“Remember that, although the economy is doing better in some areas, you have also have some challenges, especially with the smaller businesses,” Wilkey said.

Aflac issued its quarterly report after the New York Stock Exchange’s close Tuesday. In trading for the day, shares jumped $1.51, or 2.4 percent, to $63.36. The 52-week trading range is $53.51 to $67.62 per share.

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