It doesn't occur to many investors in the U.S. that some businesses have considerable international operations. One great example is AFLAC (AFL -2.43%), which actually offers more of its insurance-based products in the Japanese market than it does domestically. That has been a problem when the U.S. dollar is strong, but recently, the yen has strengthened, and coming into Thursday's third-quarter financial report, Aflac investors fully expect that the company would finally reap the rewards of currency exposure.
Aflac's results were solid, and even though they included some concerns, the overall picture has a lot of growth potential. Let's take a closer look at how Aflac did and what's ahead for the insurer looking forward.
Aflac keeps riding the Japan success story
Aflac's third-quarter results looked solid. Total revenue jumped almost 13.5%, to $5.72 billion, which was only slightly below the 14% growth rate that investors were expecting to see. Net income was up 11%, to $629 million. After making appropriate adjustments, Aflac saw adjusted earnings weigh in at $1.82 per share, which easily topped the $1.74 per-share consensus forecast among investors.
Looking more closely at the numbers, Aflac benefited from the much stronger yen during the period. A year ago, the dollar fetched 122.15 yen, but during the just-ended third quarter, that rate had fallen to 102.37 yen. Aflac said that, because of that move, its operating earnings were $0.15 per share higher than they would have been without the currency shift.
Even in currency-neutral terms, Aflac did reasonably well. Aflac Japan posted premium income gains of 1.1%, but the dollar's losses hit net investment income by almost 9%. Total revenue fell half a percent, and pre-tax operating margin fell more than a percentage point, in part because of currency issues.
New premium sales fell 16% during the quarter, thanks largely to deliberate efforts to limit sales of the company's first-sector products, which include child-endowment and similar products. By contrast, cancer and medical product sales in Japan rose slightly from the year-ago quarter.
Meanwhile, in the U.S., Aflac's numbers were also mixed. Premium income and total revenue both climbed 1.4%, and net investment income gains of nearly 2% added to Aflac's performance. Pretax operating margin rose by more than two full percentage points, with Aflac pointing to favorable claim trends in explaining the increase. Yet total new premium sales fell nearly 2%.
Aflac CEO Daniel Amos was generally pleased with the way the insurer performed. The CEO noted that both divisions performed well over the quarter, while still presenting some of the challenges each faces. In the U.S., Amos said, "While sales in the quarter were disappointing, I believe the measures we've taken to strengthen our sales infrastructure are laying the groundwork for better sales opportunities in the future."
What's ahead for Aflac?
Yet Amos is extremely enthusiastic about Aflac's future. "As we continue to focus on initiatives designed to drive future growth," Amos said, "our expectations is to increase spending in the fourth quarter, particularly related to promotional and IT initiatives" that Aflac believes will enhance growth and profitability.
Aflac also boosted its guidance for the remainder of the year. The insurer now expects operating earnings to come in between $6.40 and $6.60 per share, up from its previous range of $6.17 to $6.41 per share. Yet the company also noted that, if the yen stays in a range of between 100 and 110 to the dollar during the fourth quarter, then operating earnings of $1.53 to $1.82 per share would potentially lift its full-year figures above even that higher range to a new $6.78 to $7.07 per-share level.
Finally, Aflac gave investors a dividend boost. Going forward, investors will receive about 5% more each quarter, and Aflac celebrated the fact that this increase marks the 34th straight year of dividend increases. That move will keep Aflac on the list of Dividend Aristocrats for another year.
Aflac investors didn't react strongly to the results, keeping the stock roughly unchanged in after-hours trading immediately following the announcement. Still, in the long run, Aflac appears to be on course to keep investors happy, while gradually growing its business over time.