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Aflac Keeps Moving Forward

By Dan Caplinger - Apr 25, 2018 at 7:15PM

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Find out the insurance company's latest move.

Aflac (AFL 1.41%) has been a long-term winner for investors, with steadily rising share prices reflecting the core appeal of its business. With supplemental insurance products for workers both in the U.S. and Japan, Aflac has tapped into the need among employees to go beyond the default group coverage that employers typically provide as part of their benefits packages.

Coming into Wednesday's first-quarter financial report, Aflac investors hoped that the insurer would be able to keep up its positive momentum and continue to find new ways to serve its customer base. With a corporate move to make its Japanese business into a subsidiary, Aflac hopes to keep making incremental progress in boosting revenue and net income for years to come.

White duck with yellow beak using blue smartphone.

Image source: Aflac.

How Aflac started 2018

Aflac's first-quarter results were largely favorable. Revenue was higher by 3% at $5.46 billion, more or less matching what most investors were expecting on Aflac's top line. Net income jumped 21% to $717 million, and after making allowances for extraordinary items, adjusted earnings of $1.05 per share were far higher than the consensus forecast of $0.97 per share among those following the stock.

Aflac turned things around from previous quarters largely because of a reversal in the prior strength of the U.S. dollar. The Japanese yen strengthened by about 5% during the quarter compared to the year-earlier period, and that helped make Aflac Japan's growth rates stronger than they were in local-currency terms. Aflac said that the currency gains added about $0.03 per share to its bottom line for the quarter.

Even so, Aflac continued to see pressure on its Japanese operations due to its extensive restructuring efforts across the Pacific. Premium income fell 2.6% in local-currency terms, with stable investment income helping to cushion the blow to some extent. Adjusted earnings for the segment inched higher by about 1%, thanks largely to stronger profit margin figures. Even so, weakness in sales of cancer, medical, and income support products sent what Aflac calls its third-sector sales downward by double-digit percentages, as the unit faced difficult comparisons with prior-year results as Aflac contemplates new product rollouts.

U.S. results were better for the insurance company. Premium income climbed 2.7%, and a slight decline in investment income still left total revenue higher overall. Adjusted pre-tax earnings were higher by 9%, reflecting better margin.

What's ahead for Aflac?

One thing that Aflac did during the quarter that will have some impact on future performance is to make Aflac Japan into a formal subsidiary. CEO Daniel Amos described the move, saying, "This new corporate structure aligns Aflac with global regulatory frameworks and enhances our financial and business flexibility, while remaining consistent with our current financial strength ratings and enterprise risk management framework." The CEO also pointed to solid strategies in the U.S. market even as it works to keep improving things in Japan.

Looking ahead, Aflac believes it can build even more momentum going forward. The company believes that third-sector sales in Japan should return to their historical 2% to 3% growth rate, and acceleration later in the year in the U.S. could pull full-year sales growth for the segment upward by 3% to 5%. Returning capital to shareholders will also be a key feature for the remainder of the year, with Aflac still seeing buybacks of somewhere from $1.1 billion and $1.4 billion for 2018 in total.

Aflac investors took the news in stride, and the stock didn't move much in after-hours trading following the announcement. Investors in insurance companies tend to like predictability in their investments, so the solid results that Aflac has been able to produce over the years are exactly what many of the insurance company's shareholders want to hear quarter after quarter.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool recommends Aflac. The Motley Fool has a disclosure policy.

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