Supplemental insurance giant Aflac (NYSE:AFL) is more complicated than it looks, in large part because it has extensive Japanese operations that are actually bigger than its U.S. business. That introduces a challenge for many U.S. investors, who aren't used to looking at multinational insurance companies in which the overseas operations dwarf domestic consideration and who, therefore, have to look at issues like currency risk and international investment results.
Coming into Thursday's first-quarter financial report, Aflac investors were prepared for modest declines in earnings and revenue, and the insurance company wasn't able to avoid that outcome. However, the insurer repeated its guidance for the full year, and it remains optimistic about its long-term future. Let's take a closer look at Aflac to see how it did and what lies ahead.
Aflac deals with declines
Aflac's first-quarter results weren't all that attractive at first glance. Total revenue was down almost 3%, to $5.31 billion, which was a little worse than the 2% decline that many investors were expecting to see. GAAP net income dropped a more precipitous 19%, to $592 million. Adjusted operating earnings per share came in at $1.67, which was down a bit less than 1% from the year-ago quarter and was better than the consensus forecast of $1.62 per share among those following the stock.
Looking at Aflac's numbers, the yen's fluctuations finally calmed down somewhat, reducing foreign-exchange impacts on the insurer's results. The yen strengthened to 113.56 per dollar during this year's first quarter compared to 115.35 in the same quarter last year. The stronger yen had a positive impact on operating earnings, but the size of the boost was tiny, adding just $0.01 per share to its quarterly results.
In the Japan segment, Aflac continued to see some obstacles to growth, especially in local currency terms. Premium income was down 1%, with weakness in the first-sector child-endowment market outweighing gains in third-sector sales of cancer, medical, and income support products.
Net investment income was down 6%, and costs of hedging exposure to the yen-dollar exchange rate rose by more than half, to $52 million. Total new premium sales were down almost 30% in local currency terms, with a more than 80% plunge in first-sector sales. Yet those moves were intentional on Aflac's part, as the insurer wanted to limit its interest rate exposure by favoring other types of products.
Aflac's U.S. unit once again looked more favorable. Premium income rose 1.7%, and net investment income was up 2%. Operating income fell almost 7%, however, even as new premium sales were up nearly 2% during the quarter.
What's ahead for Aflac?
CEO Daniel Amos kept a good perspective on the way Aflac performed. "Our results for the first quarter are consistent with what we communicated on our December outlook call," Amos noted, and "despite the persistent low-interest rate environment, Aflac Japan, our largest earnings contributor, generated solid financial results." The CEO also noted that he believes Aflac has found the right mix of channel strategies to foster long-term growth.
Aflac also went to great lengths to explain its capital deployment strategy for the remainder of the year. Unlike many U.S. companies, Aflac repatriates profits every year, and it expects to move between 120 billion and 140 billion Japanese yen back to the U.S. this year. That should allow Aflac to repurchase $1.3 billion to $1.5 billion in shares, with an emphasis toward the first half of 2017.
Despite sluggish results, Aflac repeated its guidance for the full year. The company still believes that it will bring in between $6.40 and $6.65 per share in operating earnings in 2017, and second-quarter guidance for $1.55 to $1.70 in operating earnings per share is largely consistent with investor expectations for the company.
Aflac investors weren't entirely happy with the sluggish performance during the quarter, and the stock fell a bit more than 1% in after-hours trading following the announcement. However, Aflac has made good fundamental progress with its business, and that should help keep the company moving forward over the long run.