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UPDATE: Insurer Aflac soars to $690 million profit in third quarter

A more stable investment environment combined with strong sales in Japan helped propel Aflac Inc. to a $690 million profit in the third quarter.

The performance translated to earnings of $1.46 per share, which were sharply higher than the same July-September period a year ago when investment losses ate deeply into profits.

Earnings then were $363 million, or 77 cents per share, with investment losses totaling $226 million. In contrast, the firm reported an after-tax investment gain of $6 million in this year’s third quarter.

“Overall, we remain pleased with Aflac’s financial performance in 2010,” Dan Amos, Aflac’s chairman and chief executive officer, said in a statement.

“Our financial results in the third quarter were consistent with our expectations, and keep us on track for achieving our annual objective for operating earnings growth,” he said. “At the same time, we remain confident in the strength of our balance sheet and capital position.”

The Columbus-based company, which employs 3,900 locally and sells supplemental life and health insurance policies in the U.S. and Japan, has said it expects an increase of 9 to 12 percent in operating earnings this year, excluding the impact of the Japanese yen, which can fluctuate.

Looking ahead, the firm reaffirmed its goal of posting operating earnings of 8 to 12 percent in 2011.

The third-quarter profit beat by 7 cents the expectations of 19 Wall Street analysts polled by Thomson Financial. The group was expecting an average of $1.39 per share this quarter, and anticipates the company earning $1.36 per share in the fourth quarter and $5.52 per share for the year as a whole.

The primary engine for reaching those objectives looks to be Aflac Japan, which accounts for about 70 percent of the firm’s sales.

During the quarter, total revenues in Japan climbed 12.5 percent to $4.1 billion, sparked by a 13 percent jump in premium income and a nearly 10 percent rise in investment income. For the first nine months of this year, total revenues were $11.7 billion, up 9.6 percent.

“It’s doing very well,” said Ken Janke, Aflac’s deputy chief financial officer. “We’ve had four consecutive quarters now of double-digit sales growth in Japan.”

He attributed the strong showing in the Asian nation to the continuous development of new products and heightened marketing of them. For instance, a child endowment life insurance policy that is used to pay for higher education experienced a sales increase of nearly 119 percent in the quarter.

Aflac U.S., meanwhile, remains a challenge for the company, said Janke, with the “really lousy economic backdrop” undermining consumer confidence. The company sells many of its policies to workers employed by small businesses, which are still struggling to rebound from the severe recession.

“The good news is people are reluctant to leave their jobs, which means people are more likely to hold on to their Aflac policies than they had in the past,” Janke said. “But they’re also reluctant to part with their money. So it’s a little more challenging to make new sales than it had been in the past.”

That showed in the third-quarter numbers, with Aflac U.S. reporting total revenues of $1.3 billion, up 4.4 percent. Premium income rose 3.6 percent to $1.1 billion, while investment income increased nearly 12 percent to $138 million. For the first nine months, total revenues were $3.9 billion, up 4.4 percent.

The company has roughly 71,000 independent licensed sales agents selling its policies, although Janke noted it is having success using insurance brokers geared toward larger employers.

A major boost for Aflac this year is the more-settled atmosphere in the investment world, Janke said. The company takes money received from policyholders and invests it in various securities to both handle future claims and reward shareholders.

The uncertain financial environment that led to a $226 million investment loss in the quarter a year ago has given way to a less volatile one, the executive said, thus this quarter’s $6 million investment gain. But ultra-low interest rates continue to put a drag on revenues and earnings, he said, and so far there’s no end in sight.

“If you buy a 10-year Japanese government bond right now, based on today’s market, it’s yielding .91 percent,” said Janke, pointing out Aflac invests more than $5 billion a year from its earnings in Japan. “A lot of investors — meaning institutional investors, banks, insurance companies and others — are looking for the same thing that we are. They’re looking for fixed-income securities that pay a decent return. And that’s the challenge.”

While sales and revenues may ebb and flow somewhat, one area in which Aflac has remained consistent is its dividend.

On Tuesday, the company said it will pay a fourth-quarter cash dividend of 30 cents per share — $1.14 altogether in 2010 — marking the 28th straight year the company’s dividend has increased. The dividend is payable Dec. 1 to shareholders of record on Nov. 17.

Aflac, like other companies in the U.S., wrestled over the past year about whether or not it should cut the dividend and conserve its capital, or cash, for tougher times. But in the end, the streak remained alive.

“There was a lot of pressure out there when you look at what other companies were doing in that time of uncertainty. It was all about capital preservation,” said Robin Wilkey, who moved up into Janke’s position of senior vice president of investor relations last month as he was promoted to executive vice president and deputy chief financial officer.

“It was a very strong statement on Dan Amos’ part to say this is a very important part of the overall strategy for Aflac and to hold firm on that,” she said.

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