Insurance is a complex business, and there are many segments of the industry that have relatively little exposure to everyday people. Aflac's (AFL 1.65%) supplemental insurance products help flesh out the more basic health and disability insurance coverage that many Americans get through work-based group benefit plans, and Japanese customers also benefit from Aflac's extensive product lineup across the Pacific. Investors have come to rely on Aflac to deliver consistent results year after year as it navigates the changing insurance markets in the countries it serves.
Coming into Wednesday's third-quarter financial report, Aflac investors were prepared to see declines in both revenue and profit from the insurance giant. Yet Aflac's bottom line was able to weather lower sales, and positive moves from the company included upgraded guidance for the remainder of the year and a much hoped-for dividend boost that kept long-term shareholders happy. Let's take a closer look Aflac and its recent performance.
Aflac keeps picking up speed
Aflac's third-quarter results continued the positive results that the insurer gave investors last quarter. Revenue fell almost 4% to $5.51 billion, but that was a less dramatic decline than most of those following the stock had expected to see. Net income rose by 14% to $716 million, and even after making adjustments for various extraordinary items, adjusted earnings of $1.80 per share were $0.17 better than the consensus forecast among investors.
Much of the reason for the decline in dollar-denominated results was the weakness of the Japanese yen. Exchange rates worsened by almost 8% to just over 111 yen per dollar, and that reduced the dollar value of the extensive yen-based sales and profits that Aflac earned during the period. Aflac said that the currency issue reduced operating earnings by about $0.07 during the quarter, which was considerably greater than the impact last quarter.
Yet some of the drop was due to planned strategic moves. In its Japanese segment, Aflac has been moving away from what it calls its first sector savings products, emphasizing instead the third sector market. Overall, that sent Aflac Japan's premium income down 3.5% even when measured in local-currency terms, and a 1% rise in net investment income wasn't enough to offset that drop. Pretax operating profit fell just over 1% during the quarter. The good news is that Aflac has almost completed its product mix shift, nearly eliminating the interest rate sensitivity of its child endowment and other first sector products.
As we've seen in past quarters, Aflac's U.S. performance was better. Premium income was up more than 2%, pulling revenue and net investment income higher as well. Yet higher amounts of internal investment had a downward impact on pre-tax operating profit, which eased downward by 2%. Retention rates continued to improve, and total annualized premium sales were up at a healthy clip from year-ago levels.
What's ahead for Aflac?
CEO Daniel Amos was happy with the way that Aflac has kept moving forward with long-range strategic planning to emphasize its best market opportunities. "Our third-quarter and year-to-date financial results in both Japan and the U.S. reflected solid performance," Amos said, repeating nearly verbatim his remarks from last quarter, "and continued our progress toward achieving the company's objectives for 2017." The CEO noted that Aflac Japan is overcoming difficult comparisons from year-earlier results, while the U.S. business has seen the positive consequences from efforts to promote growth.
Aflac also moved forward with expected plans to boost its dividend. Given that the insurer repeated its plans to repatriate 120 billion to 140 billion Japanese yen to the U.S. in 2017, Aflac had ample money to use in delivering a nearly 5% rise to the quarterly payout. The move marks the 35th straight year that Aflac has boosted its dividend, and it will also use $1.3 billion to $1.5 billion toward buying back its stock.
Finally, Aflac was able to increase its guidance for the remainder of the year. The insurer believes it will earn $6.75 to $6.95 per share on an operating basis exclusive of currency impacts, up $0.30 to $0.35 per share from its previous guidance. That works out to fourth-quarter earnings of $1.42 to $1.66 per share using reasonable currency exchange rate assumptions.
Aflac investors seemed modestly pleased with the performance, and the stock climbed a bit less than 1% in after-hours trading following the announcement. For the most part, Aflac's results were largely expected, and in the context of its longer-term performance, the insurer appears to be on track for continued success.