Aflac Incorporated reported its second quarter results.

Reflecting the stronger yen/dollar exchange rate, total revenues rose 2.8% to $5.4 billion during the second quarter of 2016, compared with $5.3 billion in the second quarter of 2015. Net earnings were $548 million, or $1.32 per diluted share, compared with $573 million, or $1.32 per share, a year ago. 

Net earnings in the second quarter of 2016 included $13 million, or $.03 per diluted share, of after-tax net realized investment losses from securities transactions and impairments, compared with net after-tax gains of $60 million, or $.14 per diluted share, a year ago. Hedging costs related to certain dollar investments of Aflac Japan on an after-tax basis, were $31 million in the quarter, or $.08 per diluted share. Realized after-tax net investment losses from other derivative and hedging activities in the quarter were $91 million, or $.22 per diluted share. In addition, net earnings included an after-tax loss of $24 million, or $.06 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. Due to the unpredictable and uncontrollable nature of these reconciling items, the company does not calculate a GAAP equivalent of its forward-looking operating earnings guidance.

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, settlements of reinsurance retrocessions, 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 2016 was 108.28, or 11.9% stronger than the average rate of 121.20 in the second quarter of 2015. For the first six months, the average exchange rate was 111.82, or 7.4% stronger than the rate of 120.14 a year ago. Aflac Japan's growth rates in dollar terms for the second quarter and first six months were magnified as a result of the stronger yen/dollar exchange rate.

Operating earnings in the second quarter were $707 million, compared with $651 million in the second quarter of 2015. Operating earnings per diluted share in the quarter increased by 14.0% from a year ago to $1.71. The stronger yen/dollar exchange rate increased operating earnings per diluted share by $.09 for the second quarter. Excluding the impact from the stronger yen, operating earnings per diluted share increased 8.0%.

Results for the first six months of 2016 were also magnified by the stronger yen. Total revenues were up 3.6% to $10.9 billion, compared with $10.5 billion in the first half of 2015. Net earnings were $1.3 billion, or $3.06 per diluted share, compared with $1.2 billion, or $2.83 per diluted share, for the first six months of 2015. Operating earnings for the first half of 2016 were $1.4 billion, or $3.44 per diluted share, compared with $1.3 billion, or $3.04 per diluted share, in 2015. Excluding the positive impact of $.12 per share from the stronger yen, operating earnings per diluted share increased 9.2% for the first six months of 2016.

Total investments and cash at the end of June 2016 were $126.0 billion, compared with $114.3 billion at March 31, 2016.

In the second quarter, Aflac repurchased $400 million, or 5.9 million of its common shares. For the first half of the year, the company purchased $1.0 billion, or 16.0 million of its common shares. At the end of June, the company had 32.3 million shares available for purchase under its share repurchase authorizations.

Shareholders' equity was $22.6 billion, or $54.98 per share, at June 30, 2016, compared with $20.0 billion, or $48.22 per share, at March 31, 2016. Shareholders' equity at the end of the second quarter included a net unrealized gain on investment securities and derivatives of $6.4 billion, compared with a net unrealized gain of $4.7 billion at the end of March 2016. The annualized return on average shareholders' equity in the second quarter was 10.3%. 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 18.0% for the second quarter of 2016, or 15.5%, excluding the impact of the yen on operating earnings.

AFLAC JAPAN

In yen terms, Aflac Japan's premium income increased 1.8% in the second quarter. Net investment income decreased 5.4%. Investment income was suppressed by the stronger yen/dollar exchange rate in translating dollars to yen. Total revenues were up .7% in the second quarter. The pretax operating profit margin declined to 20.7% from 21.1% a year ago. The pretax operating earnings in yen decreased 1.0% on a reported basis and increased 3.0% on a currency-neutral basis. For the first half of the year, premium income in yen increased 1.0%, and net investment income fell 3.6%. Total revenues in yen were up .2%, and pretax operating earnings declined .9%.

Aflac Japan's growth rates in dollar terms for the second quarter were magnified as a result of the significantly stronger yen/dollar exchange rate. Premium income increased 14.3% to $3.4 billion in the second quarter. Net investment income was up 6.1% to $642 million. Total revenues increased 12.9% to $4.1 billion. Pretax operating earnings increased 10.8% to $839 million. For the first six months, premium income was $6.6 billion, or 8.7% higher than a year ago. Net investment income increased 3.8% to $1.3 billion. Total revenues were up 7.9% to $7.9 billion. Pretax operating earnings were $1.7 billion, or 6.4% higher than a year ago.

In the second quarter, total new annualized premium sales decreased 1.1% to ¥30.3 billion, or $280 million. Third sector sales, which include cancer and medical products, increased 11.2% in the quarter. Total first sector sales, which include products such as WAYS and child endowment, decreased 24.7% in the quarter.

For the first six months of the year, new annualized premium sales were up 6.7% to ¥61.4 billion, or $551 million. Third sector sales increased 6.4% in the first half of the year.

AFLAC U.S.

Aflac U.S. premium income increased 2.2% to $1.4 billion in the second quarter. Net investment income was up 4.4% to $176 million. Total revenues increased 2.5% to $1.5 billion. The pretax operating profit margin was 19.0%, compared with 19.5% a year ago. Pretax operating earnings were $291 million, a decrease of .3% for the quarter. For the first six months, total revenues were up 2.4% to $3.1 billion and premium income rose 2.2% to $2.7 billion. Net investment income increased 4.7% to $350 million. Pretax operating earnings were $623 million, 8.0% higher than a year ago.

Aflac U.S. total new annualized premium sales increased 1.0% in the quarter to $347 million. For the first half of the year, total new sales were up 2.3% to $675 million.

DIVIDEND

The board of directors declared the third quarter cash dividend. The third quarter dividend of $.41 per share is payable on September 1, 2016 to shareholders of record at the close of business on August 24, 2016.

OUTLOOK

Commenting on the company's second quarter results, Chairman and Chief Executive Officer Daniel P. Amos stated: "I am pleased that our second quarter financial results in both Japan and the United States reflected solid performance and advanced our progress toward achieving the company's objectives for 2016.

"In Japan, sales of our third sector products were particularly noteworthy, increasing 11.2% for the quarter. Recognizing the negative interest rate environment in Japan, we are encouraged  that the actions we've been taking throughout the second quarter to limit sales of our first sector products are gaining traction, as first sector products sales decreased 24.7% in the quarter. As we continue to implement additional measures, we anticipate a sharp decline of at least 50% in first sector sales for the second half of the year. For the full year 2016, we continue to anticipate third sector sales will be in the range of down 3% to up 2%. I would reiterate that long-term, we continue to believe the compound annual growth rate for third sector sales will be in the range of 4% to 6%.

"From a financial perspective, Aflac U.S. also generated solid performance in the second quarter and for the first half of the year. Additionally, keep in mind that while sales in the second quarter were below our expectations, we anticipate the achievement of our annual U.S. sales target will be increasingly reliant on fourth quarter production. We continue to concentrate our efforts on increasing Aflac U.S. sales 3% to 5% for the year.

"We remain committed to maintaining strong capital ratios on behalf of our policyholders. We believe our capital strength positions us to repatriate in the range of ¥120 to ¥150 billion for the calendar year 2016. This reinforces our plan to repurchase about $1.4 billion of our common stock in 2016, with the majority having been front-end loaded in the first half of the year.

"In the second half of the year, as we continue to focus on initiatives designed to drive future growth, our expectation is to increase spending, particularly related to promotional and IT expenditures. I want to reiterate that our annual objective is to produce operating earnings per diluted share of $6.17 to $6.41, assuming the 2015 average exchange rate of 120.99 yen to the dollar. If the yen averages ¥100 to ¥110 to the dollar for the third quarter, we would expect operating earnings, a non-GAAP measure, to be approximately $1.58 to $1.86 per diluted share in the third quarter. I would remind you that the low interest rate environment continues to be challenging for investments, especially with negative interest rates in Japan, making it difficult to invest cash flows at attractive yields while maintaining a prudent risk tolerance. We are well-positioned in the two best insurance markets in the world and are working very hard to achieve our earnings-per-share objective while also ensuring we deliver on our promise to policyholders."