COLUMBUS, Ga., Feb. 3, 2015 /PRNewswire/ – Aflac Incorporated today reported its fourth quarter results.
Reflecting the weaker yen/dollar exchange rate, total revenues fell 4.9% to $5.5 billion during the fourth quarter of 2014, compared with $5.8 billion in the fourth quarter of 2013. Net earnings were $703 million, or $1.57 per diluted share, compared with $675 million, or $1.45 per share, a year ago.Â
Net earnings in the fourth quarter of 2014 included after-tax net realized investment gains of $83 million, or $.19 per diluted share, compared with net after-tax gains of $6 million, or $.01 per diluted share, a year ago. After-tax realized investment gains from securities transactions in the quarter were $28 million, or $.07 per diluted share. Hedging costs related to certain dollar investments of Aflac Japan on an after-tax basis, were $1 million in the quarter, or nil per diluted share. Realized after-tax net investment gains from other derivative and hedging activities in the quarter were $56 million, or $.12 per diluted share. In addition, net earnings included a gain of $39 million, or $.09 per diluted share, from other and nonrecurring items.
Aflac believes that an analysis of operating earnings, a non-GAAP financial measure, is vitally important to an understanding of the company’s underlying profitability drivers. Aflac defines operating earnings as the profits derived from operations, inclusive of interest cash flows associated with notes payable, but before realized investment gains and losses from securities transactions, impairments, and derivative and hedging activities, as well as other and nonrecurring items. Aflac’s derivative activities are primarily used to hedge foreign exchange and interest rate risk in the company’s investment portfolio as well as manage foreign exchange risk in certain notes payable and forecasted cash flows denominated in yen. Management uses operating earnings to evaluate the financial performance of Aflac’s insurance operations because realized gains and losses from securities transactions, impairments, and derivative and hedging activities, as well as other and nonrecurring items, tend to be driven by general economic conditions and events or related to infrequent activities not directly associated with the company’s insurance operations, and therefore may obscure the underlying fundamentals and trends in Aflac’s insurance operations.
Furthermore, because a significant portion of Aflac’s business is in Japan, where the functional currency is the yen, the company believes it is equally important to understand the impact on operating earnings from translating yen into dollars. Aflac Japan’s yen-denominated income statement is translated from yen into dollars using an average exchange rate for the reporting period, and the balance sheet is translated using the exchange rate at the end of the period. However, except for certain transactions such as profit repatriation and the Aflac Japan dollar investment program, the company does not actually convert yen into dollars. As a result, Aflac views foreign currency translation as a financial reporting issue rather than an economic event for the company or its shareholders. Because changes in exchange rates distort the growth rates of operations, readers of Aflac’s financial statements are also encouraged to evaluate financial performance excluding the impact of foreign currency translation. The chart toward the end of this release presents a comparison of selected income statement items with and without foreign currency changes to illustrate the effect of currency.
The average yen/dollar exchange rate in the fourth quarter of 2014 was 114.44, or 12.2% weaker than the average rate of 100.54 in the fourth quarter of 2013. For the full year, the average exchange rate was 105.46, or 7.5% weaker than the rate of 97.54 a year ago. Aflac Japan’s growth rates in dollar terms for the fourth quarter and the full year were suppressed as a result of the weaker yen/dollar exchange rate.
Operating earnings in the fourth quarter were $581 million, compared with $651 million in the fourth quarter of 2013. Operating earnings per diluted share decreased by 7.9% to $1.29 in the quarter, compared with $1.40 a year ago. The weaker yen/dollar exchange rate decreased operating earnings per diluted share by $.08 for the fourth quarter. Excluding the impact from the weaker yen, operating earnings per diluted share decreased 2.1%, due primarily to anticipated increased spending in the fourth quarter.
Results for the full year of 2014 were also suppressed by the weaker yen. Total revenues were down 5.1% to $22.7 billion, compared with $23.9 billion for the full year of 2013. Net earnings were $3.0 billion, or $6.50 per diluted share, compared with $3.2 billion, or $6.76 per diluted share, for the full year of 2013. Operating earnings for the full year of 2014 were $2.8 billion, or $6.16 per diluted share, compared with $2.9 billion, or $6.18 per diluted share, in 2013. Excluding the negative impact of $.26 per share from the weaker yen, operating earnings per diluted share rose 3.9% for the full year of 2014.
Total investments and cash at the end of December 2014 were $107.3 billion, compared with $114.7 billion at September 30, 2014.
In the fourth quarter, Aflac repurchased $510 million, or 8.6 million shares, of its common stock. For the full year, the company purchased $1.2 billion, or 19.7 million of its shares. At the end of December, the company had 29.6 million shares available for purchase under its share repurchase authorizations.
Shareholders’ equity was $18.7 billion, or $42.30 per share, at December 31, 2014, compared with $17.9 billion, or $39.63 per share, at September 30, 2014. Shareholders’ equity at the end of the fourth quarter included a net unrealized gain on investment securities and derivatives of $4.7 billion, compared with a net unrealized gain of $3.4 billion at the end of September 2014. The annualized return on average shareholders’ equity in the fourth quarter was 15.4%. On an operating basis (excluding total net realized investment gains/losses in net earnings, unrealized investment gains/losses, and derivative gains/losses in shareholders’ equity), the annualized return on average shareholders’ equity was 16.3% for the fourth quarter, or 18.9%, excluding the impact of the yen. For the full year, operating return on average shareholders’ equity, excluding currency, was 22.6%.
AFLAC JAPAN
In yen terms, Aflac Japan’s premium income, net of reinsurance, increased .2% in the fourth quarter. Net investment income increased 10.3%. Investment income growth was magnified by the weaker yen/dollar exchange rate because approximately 48% of Aflac Japan’s fourth quarter investment income was dollar-denominated, compared with 45% a year ago. Total revenues were up 1.7% in the fourth quarter. The pretax operating profit margin increased in the fourth quarter to 20.1% from 19.9% in the prior year. Pretax operating earnings in yen increased 2.8% on a reported basis but decreased 2.1% on a currency-neutral basis. For the full year, premium income in yen increased .1%, and net investment income rose 8.8%. Total revenues in yen were up 1.3%, and pretax operating earnings in yen grew 3.1%. On a currency-neutral basis, pretax operating earnings grew .3%.
Aflac Japan’s growth rates in dollar terms for the fourth quarter were suppressed as a result of the significantly weaker yen/dollar exchange rate. Premium income decreased 12.0% to $3.2 billion in the fourth quarter. Net investment income decreased 3.2% to $643 million. Total revenues decreased 10.7% to $3.8 billion. Pretax operating earnings declined 9.7% to $770 million. For the full year, premium income was $13.9 billion, or 7.5% lower than a year ago. Net investment income increased .4% to $2.7 billion. Total revenues were down 6.4% to $16.6 billion. Pretax operating earnings were $3.5 billion, or 4.7% lower than a year ago.
In the fourth quarter, total new annualized premium sales rose 1.5% to Â¥33.4 billion, or $292 million. Third sector sales, which include cancer and medical products, increased 28.5% in the quarter. Bank channel sales decreased 37.6%, primarily reflecting continued declines in sales of the company’s first sector WAYS product.
For the full year, new annualized premium sales were down 23.3% to ¥114.5 billion, or $1.1 billion. Third sector sales increased 6.1% for the full year.
AFLAC U.S.
Aflac U.S. premium income increased 1.2% to $1.3 billion in the fourth quarter. Net investment income was up 1.8% to $161 million. Total revenues increased 1.2% to $1.5 billion. The pretax operating profit margin was 13.7%, compared with 14.2% a year ago. Pretax operating earnings were $201 million, a decrease of 2.2% for the quarter. For the full year, total revenues were up 1.2% to $5.9 billion and premium income rose 1.1% to $5.2 billion. Net investment income increased 2.1% to $645 million. Pretax operating earnings were $1.1 billion, 3.3% higher than a year ago.
Aflac U.S. total new annualized premium sales increased 14.1% in the quarter to $454 million. For the full year, total new sales increased .7% to $1.4 billion.
DIVIDEND
The board of directors declared the first quarter cash dividend. The first quarter dividend of $.39 per share is payable on March 2, 2015, to shareholders of record at the close of business on February 17, 2015.
OUTLOOKÂ Â Â
Commenting on the company’s fourth quarter results, Chairman and Chief Executive Officer Daniel P. Amos stated: “We are extremely pleased with our sales in Japan and the U.S. More importantly, our 2014 operating earnings per diluted share growth of 3.9% excluding currency was at the high end of our 3% to 4% expectation. Â
“With 2014 marking Aflac Japan’s 40th year of operations, it is especially impressive that third sector sales increased 28.5% in the fourth quarter, particularly in comparison to strong third sector sales results that came in the fourth quarter of the prior two years. Aflac Japan’s third sector sales growth for the year was 6.1%, which was at the high end of our annual sales target. On the distribution side, our traditional agencies have been, and remain, key to our success. I’m also pleased that we continued to build on our partnership with Japan Post throughout the year, expanding the number of postal outlets and their agents selling our cancer products. Cancer insurance sales through all distribution outlets were up an impressive 176% for the quarter. As we look ahead to 2015, we believe that for the first nine months, third sector sales will average a 15% increase. With fourth quarter sales facing difficult comparisons, we believe third sector sales in the final quarter of 2015 could be down sharply. However, as always, we will be working to find ways to minimize that decline. At the end of the second quarter, when we have more insight, we will give additional guidance on the fourth quarter.
“Turning to Aflac U.S., I am very pleased with our fourth quarter sales results, which surpassed our expectations, increasing 14.1%. The strong fourth quarter sales drove annual sales results to an increase of .7%, which significantly exceeded our most recent sales expectation for the year. It is rewarding to see the changes we made to our sales organization in 2014, both in the career agent channel and the broker channel, yielded such promising results. Although one quarter doesn’t make a trend, I am very encouraged with how far we’ve come in a short period of time. However, I am not willing to say we’ve had a sales turnaround until I see first half sales results in 2015. Saying that, I remain encouraged and believe we should have a 3% to 7% increase in U.S. sales, with a target of 5%.
