Aflac Incorporated (NYSE: AFL) today reported its second quarter results.

Reflecting the weaker yen/dollar exchange rate, total revenues fell 3.4% to $5.8 billion during the second quarter of 2014, compared with $6.0 billion in the second quarter of 2013. Net earnings were $810 million, or $1.78 per diluted share, compared with $889 million, or $1.90 per share, a year ago. 

Net earnings in the second quarter of 2014 included after-tax net realized investment gains of$60 million, or $.13 per diluted share, compared with net after-tax gains of $130 million, or $.28per diluted share, a year ago. After-tax realized investment gains from securities transactions in the quarter were $63 million, or $.14 per diluted share. On an after-tax basis, impairments were$18 million in the quarter, or $.04 per diluted share. Hedging costs related to certain dollar investments of Aflac Japan on an after-tax basis, were $16 million in the quarter, or $.04 per diluted share. Realized after-tax net investment gains from other derivative and hedging activities in the quarter were $31 million, or $.07 per diluted share. In addition, net earnings included a loss of $7 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 our 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 second quarter of 2014 was 102.15, or 3.3% weaker than the average rate of 98.76 in the second quarter of 2013. For the first six months, the average exchange rate was 102.42, or 6.7% weaker than the rate of 95.60 a year ago. Aflac Japan's growth rates in dollar terms for the second quarter and first six months were suppressed as a result of the weaker yen/dollar exchange rate.

Operating earnings in the second quarter were $757 million, compared with $759 million in the second quarter of 2013. Operating earnings per diluted share in the quarter increased by 2.5% to $1.66 in the quarter, compared with $1.62 a year ago. The weaker yen/dollar exchange rate decreased operating earnings per diluted share by $.03 for the second quarter. Excluding the impact from the weaker yen, operating earnings per diluted share increased 4.3%.

Results for the first six months of 2014 were also suppressed by the weaker yen. Total revenues were down 6.3% to $11.5 billion, compared with $12.3 billion in the first half of 2013. Net earnings were $1.5 billion, or $3.38 per diluted share, compared with $1.8 billion, or $3.80 per diluted share, for the first six months of 2013. Operating earnings for the first half of 2014 were$1.5 billion, or $3.36 per diluted share, compared with $1.5 billion, or $3.31 per diluted share, in 2013. Excluding the negative impact of $.13 per share from the weaker yen, operating earnings per diluted share rose 5.4% for the first six months of 2014.

Total investments and cash at the end of June 2014 were $114.7 billion, compared with $110.5 billion at March 31, 2014.

In the second quarter, Aflac repurchased $100 million, or 1.6 million shares, of its common stock. For the first half of the year, the company purchased $515 million, or 8.1 million of its shares. At the end of June, the company had 41.1 million shares available for purchase under its share repurchase authorizations.

Shareholders' equity was $17.6 billion, or $38.76 per share, at June 30, 2014, compared with$15.7 billion, or $34.53 per share, at March 31, 2014. Shareholders' equity at the end of the second quarter included a net unrealized gain on investment securities and derivatives of $2.9 billion, compared with a net unrealized gain of $1.9 billion at the end of March 2014. The annualized return on average shareholders' equity in the second quarter was 19.5%. 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 21.3% for the second quarter of 2014, or 22.3%, excluding the impact of the yen.

AFLAC JAPAN

In yen terms, Aflac Japan's premium income fell .4% in the second quarter. Net investment income increased 7.5%. Investment income growth was magnified by the weaker yen/dollar exchange rate because approximately 46% of Aflac Japan's second quarter investment income was dollar-denominated, compared with 44% a year ago. Total revenues were up .7% in the second quarter. The pretax operating profit margin increased in the second quarter to 21.7% from 21.5% in the prior year. Pretax operating earnings in yen increased 2.0% on a reported basis and 1.2% on a currency-neutral basis. For the first half of the year, premium income in yen increased .5%, and net investment income rose 8.4%. Total revenues in yen were up 1.5%, and pretax operating earnings grew 3.3%.

Aflac Japan's growth rates in dollar terms for the second quarter were suppressed as a result of the weaker yen/dollar exchange rate. Premium income decreased 3.8% to $3.6 billion in the second quarter. Net investment income was up 4.0% to $680 million. Total revenues decreased 2.7% to $4.3 billion. Pretax operating earnings declined 1.3% to $927 million. For the first six months, premium income was $7.1 billion, or 6.4% lower than a year ago. Net investment income increased 1.1% to $1.3 billion. Total revenues were down 5.5% to $8.5 billion. Pretax operating earnings were $1.9 billion, or 3.6% lower than a year ago.

In the second quarter, total new annualized premium sales fell 7.7% to ¥28.0 billion, or $273 million. Third sector sales, which include cancer and medical products, increased 4.5% in the quarter. Bank channel sales declined 19.9%, primarily reflecting continued declines in sales of the company's first sector WAYS product.

For the first six months of the year, new annualized premium sales were down 34.0% to ¥55.5 billion, or $542 million. Third sector sales increased 3.2% in the first half of the year.

AFLAC U.S.

Aflac U.S. premium income increased 1.2% to $1.3 billion in the second quarter. Net investment income was up 2.5% to $161 million. Total revenues increased 1.3% to $1.5 billion. The pretax operating profit margin increased to 20.3% from 19.5% a year ago, reflecting improvement in the benefit ratio. Pretax operating earnings were $300 million, an increase of 5.7% for the quarter. For the first six months, total revenues were up 1.2% to $2.9 billion and premium income rose 1.1% to $2.6 billion. Net investment income increased 2.5% to $322 million. Pretax operating earnings were $603 million, 6.8% higher than a year ago.

Aflac U.S. total new annualized premium sales decreased 8.2% in the quarter to $334 million. Additionally, persistency in the quarter was 76.4%, compared with 76.3% a year ago. For the first half of the year, total new sales declined 6.4% to $651 million.

DIVIDEND

The board of directors declared the third quarter cash dividend. The third quarter dividend of$.37 per share is payable on September 2, 2014, to shareholders of record at the close of business on August 20, 2014.

OUTLOOK

Commenting on the company's second quarter results, Chairman and Chief Executive OfficerDaniel P. Amos stated: "We are pleased with our overall financial results in the second quarter of 2014. Aflac Japan, our largest earnings contributor, generated strong financial results for the quarter. With respect to sales, we've seen the contribution from traditional agencies slowing down, and we've developed partnerships with new channels that have helped offset that decline. These channels include Japan Post, and we are making gradual but steady progress with advancing our sales through postal outlets. However, the second half of the year will present us with difficult comparisons due to sales of our revised medical product we introduced in August of last year. Taking these factors into account, we now anticipate third sector sales for the full year will trend toward the low end of our expectation of a 2% to 7% increase.

"From a financial perspective, Aflac U.S. continued to perform well in the second quarter. However, our sales results remain disappointing. Given sales production in the first half of the year, we now expect sales for the full year will likely be down 4% to down 8%.

"In order to drive future sales growth, we believe it is crucial to ensure all levels of our sales hierarchy have the potential to earn the best compensation in the industry. At the same time, we must more effectively and consistently execute on the U.S. sales strategy across all states. To accomplish this, we are implementing several initiatives. For example, we're enhancing compensation through an incentive bonus for the first level of our sales management, district sales coordinators, who are primarily responsible for selling Aflac products and training new sales associates. Additionally, we've made the decision to eliminate the commission-based position of state sales coordinator. To better manage our state operations, we've introduced the new position of market director. Market directors will be salaried with the opportunity to earn sales-related bonuses. These position changes begin on October 1, 2014. We currently estimate the quarterly costs related to U.S. sales initiatives will be around $.02 per diluted share beginning in the fourth quarter of 2014. We will finalize the estimate for 2015 expenses from these initiatives in our budgeting process, and they will be reflected in the 2015 guidance that we will provide in October with our third quarter earnings release.

"We remain committed to maintaining strong capital ratios on behalf of our policyholders and bondholders. Although we have not yet finalized our statutory financial statements, we estimate our second quarter 2014 risk-based capital, or RBC ratio, will exceed 800%. Additionally, we expect that Aflac Japan's estimated second quarter solvency margin ratio, or SMR, will be above 800%. Given the strength of our capital ratios, we will have repatriated ¥131.4 billion by the end of July. This reinforces our plan to repurchase $1 billion of our common stock in 2014.

"We are pleased that our earnings per share for both the second quarter and first half of the year were strong. However, we plan on increasing spending significantly in the second half of the year related to various initiatives in both the U.S. and Japan. As such, we narrowed this year's initial annual EPS guidance of 2% to 5% per diluted share and currently expect that 2014 operating earnings per diluted share on a currency neutral basis will be up 3% to 4% for the full year. If the yen averages 100 to 105 to the dollar for the third quarter, we would expect earnings in the third quarter to be approximately $1.38 to $1.47 per diluted share. Using that same exchange rate assumption for the remainder of 2014, we would expect full-year reported operating earnings to be about $6.16 to $6.30 per diluted share."