Aflac Incorporated today reported its fourth quarter results.
Reflecting the weaker yen/dollar exchange rate, total revenues decreased 3.5% to $5.3 billion during the fourth quarter of 2015, compared with $5.5 billion in the fourth quarter of 2014. Net earnings were $730 million, or $1.71 per diluted share, compared with $703 million, or $1.57 per share, a year ago.
Net earnings in the fourth quarter of 2015 included after-tax net realized investment gains of $60 million, or $.14 per diluted share, compared with net after-tax gains of $83 million, or $.19 per diluted share, a year ago. After-tax realized investment gains net of losses from securities transactions in the quarter were $77 million, or $.18 per diluted share. After-tax realized investment losses from impairments in the quarter were immaterial at $7 million, or $.01 per diluted share. Hedging costs related to certain dollar investments of Aflac Japan on an after-tax basis were $49 million in the quarter, or $.12 per diluted share. Realized after-tax net investment gains from other derivative and hedging activities in the quarter were $39 million, or $.09 per diluted share. In addition, net earnings included an after-tax gain of $2 million, or $.01 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 2015 was 121.54, or 5.8% weaker than the average rate of 114.44 in the fourth quarter of 2014. For the full year, the average exchange rate was 120.99, or 12.8% weaker than the rate of 105.46 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 $668 million, compared with $581 million in the fourth quarter of 2014. Operating earnings per diluted share increased 20.9% to $1.56 in the quarter, compared with $1.29 a year ago. The weaker yen/dollar exchange rate decreased operating earnings per diluted share by $.05 for the fourth quarter. Excluding the impact from the weaker yen, operating earnings per diluted share increased 24.8%.
Results for the full year of 2015 were also suppressed by the weaker yen. Total revenues were down 8.2% to $20.9 billion, compared with $22.7 billion for the full year of 2014. Net earnings for the full year of 2015 were $2.5 billion, or $5.85 per diluted share, compared with $3.0 billion, or $6.50 per diluted share, a year ago. Net earnings for 2015 were impacted by the early extinguishment of debt previously disclosed in the second quarter. Operating earnings for the full year of 2015 were $2.7 billion, or $6.16 per diluted share, compared with $2.8 billion, or $6.16 per diluted share, in 2014. Excluding the negative impact of $.46 per share from the weaker yen, operating earnings per diluted share rose 7.5% for the full year of 2015.
Total investments and cash at the end of December 2015 were $105.9 billion, compared with $104.9 billion at September 30, 2015.
In the fourth quarter, Aflac repurchased $234 million, or 3.8 million of its common shares. For the full year, the company purchased $1.3 billion, or 21.2 million shares. At the end of December, the company had 48.4 million shares available for purchase under its share repurchase authorizations.
Shareholders' equity was $17.4 billion, or $40.96 per share, at December 31, 2015, compared with $17.3 billion, or $40.36 per share, at September 30, 2015. Shareholders' equity at the end of the fourth quarter included a net unrealized gain on investment securities and derivatives of $3.0 billion, compared with a net unrealized gain of $3.2 billion at the end of September 2015. The annualized return on average shareholders' equity in the fourth quarter was 16.9%. 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 18.8% for the fourth quarter, or 19.4%, excluding the impact of the yen. For the full year, operating return on average shareholders' equity, excluding currency, was 20.4%.
AFLAC JAPAN
In yen terms, Aflac Japan's net premium income increased .3% in the fourth quarter, reflecting in part the impact of previously executed reinsurance agreements. Excluding the impact of reinsurance, net premium income increased 1.6%. Net investment income increased 1.0%. Investment income growth was magnified by the weaker yen/dollar exchange rate because approximately 51% of Aflac Japan's fourth quarter investment income was dollar-denominated, compared with 48% a year ago. Total revenues were up .4% in the fourth quarter. The pretax operating profit margin increased in the fourth quarter to 22.3% from 20.1% in the prior year, reflecting continued favorable claims experience in addition to lower expenses in the quarter compared to a year ago. Pretax operating earnings in yen increased 11.7% on a reported basis and increased 8.9% on a currency-neutral basis. For the full year, premium income in yen decreased .4%, and net investment income rose 4.8%. Total revenues in yen were up .5%, and pretax operating earnings in yen grew 5.3%. On a currency-neutral basis, pretax operating earnings grew .4%.
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 5.6% to $3.0 billion in the fourth quarter. Net investment income decreased 4.9% to $612 million. Total revenues decreased 5.5% to $3.6 billion. Pretax operating earnings increased 5.2% to $810 million. For the full year, premium income was $12.0 billion, or 13.1% lower than a year ago. Net investment income decreased 8.5% to $2.4 billion. Total revenues were down 12.3% to $14.5 billion. Pretax operating earnings were $3.2 billion, or 8.2% lower than a year ago.
In the fourth quarter, total new annualized premium sales decreased 5.1% to ¥31.7 billion, or $260 million. Third sector sales, which include cancer and medical products, decreased 12.7% in the quarter due to difficult comparisons. Total first sector sales, which include products such as WAYS and child endowment, increased 15.9% in the quarter.
For the full year, new annualized premium sales were up 5.5% to ¥120.9 billion, or $997 million. Third sector sales increased 13.4% for the full year.
AFLAC U.S.
Aflac U.S. premium income increased 2.3% to $1.3 billion in the fourth quarter. Net investment income was up 5.6% to $171 million. Total revenues increased 2.7% to $1.5 billion. Reflecting continued improvement in the benefit ratio, the pretax operating profit margin was 15.8%, compared with 13.7% a year ago. Pretax operating earnings were $237 million, an increase of 18.3% for the quarter. For the full year, total revenues were up 3.0% to $6.0 billion and premium income rose 2.6% to $5.3 billion. Net investment income increased 5.0% to $678 million. Pretax operating earnings were $1.1 billion, 2.7% higher than a year ago.
Aflac U.S. total new annualized premium sales increased 9.6% in the quarter to $497 million. For the full year, total new sales increased 3.7% to $1.5 billion.
DIVIDEND
The board of directors declared the first quarter cash dividend. The first quarter dividend of $.41 per share is payable on March 1, 2016, to shareholders of record at the close of business on February 16, 2016.
OUTLOOK
Commenting on the company's results, Chairman and Chief Executive Officer Daniel P. Amos stated: "We are very pleased with Aflac's financial performance for both the quarter and year. Aflac had a very strong quarter, and we finished the year above the top of the range for operating earnings per diluted share, excluding the impact of foreign currency.
"Aflac Japan, our largest earnings contributor, generated outstanding financial results in yen terms for the quarter. Additionally, the tremendous third sector sales we generated in 2015 were much better than our original expectation, generating impressive production across all channels for a 13.4% increase. This result was the highest annual third sector growth rate in the past 10 years. Cancer insurance sales, the largest contributor to this result, were up a remarkable 40.6% for the year. 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, completing the expansion of the number of postal outlets and their agents selling our cancer products to more than 20,000 outlets during 2015. As we indicated during our December outlook call, we anticipate that for 2016, sales of third sector products will be down mid-single digits following very robust production results in 2015. We continue to believe the long-term compound annual growth rate will be in the range of 4% to 6%.
"From a financial perspective, Aflac U.S. also performed well for the quarter and full year. I am very pleased with our fourth quarter new annualized premium sales, which hit an all-time record with the premium amount of $496 million. This equated to a growth rate of 9.6% for the quarter, which helped drive annual sales results to increase 3.7% for the year. I'm encouraged that the changes we made to our career and broker management infrastructure over the last 18 months are laying the foundation for expanded long-term growth opportunities. As we mentioned in our December outlook call, we anticipate that sales will be increasingly skewed toward the fourth quarter, and we believe Aflac U.S. new annualized premium growth in 2016 will be in the range of 3% to 5%, with a long-term compound annual growth rate at or above the voluntary market growth rate of 5%.
"Based on our assessment of the company's capital strength, we repatriated approximately ¥259 billion in 2015, which exceeded our expectation for the year and was driven in part by proceeds from the reinsurance transaction executed in March. As we have communicated, absent compelling alternatives, we believe that growing the cash dividend and repurchasing our shares are the most attractive means for deploying capital. We continue to anticipate that we'll repurchase $1.4 billion of our shares in 2016, largely front-end loaded in the first half of the year. As we indicated last quarter, we also increased the cash dividend 5.1%, effective with the fourth quarter, marking the 33rd consecutive year in which we've increased the cash dividend. Our objective is to grow the dividend at a rate generally in line with the increase in operating earnings per diluted share before the impact of foreign currency translation.
"As we look to 2016, our guidance remains unchanged since our December outlook call. Our objective is to produce stable operating earnings per diluted share of $6.17 to $6.41, assuming the average exchange rate in 2015 of 120.99 yen to the dollar. I would remind you that with volatile financial markets and interest rates at significantly depressed levels, it is difficult to safely invest cash flows at attractive yields. Additionally, 2016 benefit ratios in both the U.S. and Japan anticipate continued favorable experience. As always, we are working very hard to achieve our earnings-per-share objective while also ensuring we deliver on our promise to policyholders."
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