Steady sales and growth in Japan, combined with improving performance in the U.S., added up to a profit of $713 million in the second quarter of 2017, an increase of just over 30 percent, supplemental health and life insurer Aflac reported Thursday.
Aflac, headquartered on Wynnton Road in Columbus, said the profit, or net earnings, of $1.79 per diluted share came on flat total revenues of $5.42 billion, just down from $5.43 billion in the same April-June quarter of 2016.
Operating earnings — which subtract one-time financial gains and losses and other non-recurring items — were $731 million, up 7 percent from $683 million a year ago. That equates to operating earnings per diluted share of $1.83, far higher than the consensus average of $1.63 per share anticipated by the group of stock market analysts who follow the firm.
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“Aflac Japan, our largest earnings contributor, generated strong financial results both in the quarter and for the first half of the year,” Aflac Chairman and Chief Executive Officer Dan Amos, said in a statement in the firm’s earnings report. “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 percent to 6 percent.”
Third-sector sales are those policies that cover cancer and medical insurance. That area of business was up 5.8 percent in the quarter, which exceeded expectations because third-sector sales have seen strong growth for the company over the last two to three years, challenging this year’s second-quarter comparison, said Aflac Chief Financial Officer Fred Crawford.
As for the flat revenues, the CFO said that’s somewhat intentional. Yes, the weak yen in Japan has had an impact, and Aflac’s investment income there has been down due to the very low to negative interest-rate environment. But Crawford said the company also has been reducing sales of interest rate-sensitive items such as life insurance policies and savings-oriented products.
“So where you see some revenue weakness, it’s on purpose,” he said. “It’s because we’ve consciously decided that we don’t want to be involved in writing or issuing business that we think has a poor profit dynamic.”
Aflac’s business in Japan accounts for roughly three-quarters of the company’s total revenues. The balance of revenues come from the U.S., with workers purchasing coverage through the workplace. The firm also tries to find good investments for the money it brings in from premiums to cover insurance payouts to customers, generate a profit, and pay dividends to shareholders.
The company said Thursday that its board of directors approved a third-quarter cash dividend of 43 cents per share, which is payable Sept. 1 to those owning Aflac stock at the close of Aug. 23.
Discussing the U.S. operations in his comments, Amos said he was pleased with the “financial performance and continued strength in profitability.” He said the insurer expects compound annual growth in new annualized premium sales of 3 percent to 5 percent long term. The company also is continuing to manage its U.S. sales and broker channels for optimum success, and will make “tactical adjustments” where needed to meet long-term goals.
Crawford called the basic effort in the U.S. “blocking and tackling,” with Aflac focusing on recruiting sales agents and converting them into regularly producing agents. He said the company is working to freshen its U.S. product line, while it’s also seeing the benefits of the One Day Pay initiative yield financial fruit. One Day Pay is the firm’s guarantee that a customer will receive money from a claim the same day it is submitted.
“Obviously our brand is very good, but beyond our brand we’re just seeing really good customer experience scores, and I think that helps with the sale of our product inside the work site,” said the CFO, noting he anticipates seeing the second-quarter U.S. sales growth of 2.4 percent increase in the final half of this year, reaching that 3 percent to 5 percent full-year growth range.
Amos also said strong capital ratios will remain a priority for Aflac, as will increasing the insurer’s dividend, buying back stock shares and reinvesting some of its cash in the overall business. Share repurchases will be in the range of $1.3 billion to $1.5 billion this year, he said, unless something “compelling” should arise that would cause the firm to alter those numbers.
In the final six months of 2017, the CEO said, the company expects to increase spending overall, but specifically in the areas of information technology and promotion. As of now, the company anticipates operating earnings per diluted share to be in the range of $6.40 to $6.65, depending on the yen-to-dollar exchange rate.
“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,” Amos said.
Aflac released its earnings report after the close of the stock markets. In trading Thursday on the New York Stock Exchange, the firm’s shares declined 23 cents, or 0.3 percent, to $77.12. The stock’s 52-week trading range is from a low of $66.50 to a high of $79.86 per share.
The insurer is a major employer in Columbus, with it having 4,141 staffers locally at the end of May. That’s out of 5,474 total workers overall in the U.S. The company has 4,666 on its payroll in Japan. That gives Aflac a total worldwide workforce of 10,140.