Aflac Incorporated reported its first quarter results.

Total revenues decreased 2.6% to $5.3 billion during the first quarter of 2017, compared with $5.5 billion in the first quarter of 2016. Net earnings were $592 million, or $1.47 per diluted share, compared with $731 million, or $1.74 per share, a year ago. The decrease in revenue and net earnings reflects realized gains and losses in the comparable quarters and lower premium and investment income in the Japan segment attributable to the low-interest-rate environment.   

Net earnings in the first quarter of 2017 included pretax net losses of $129 million, or $.31 per diluted share on a pretax basis, compared with pretax net gains of $40 million, or $.09 per diluted share on a pretax basis, a year ago. Beginning in the first quarter of 2017, the company began reporting amortized hedge costs associated with certain U.S. dollar investments in the Japan portfolio as part of operating earnings. Pretax net realized losses from securities transactions and impairments for the first quarter amounted to $17 million and were composed of pretax net realized investment losses from securities transactions of $7 million, and pretax realized investment losses from impairments of $10 million. Pretax net realized investment losses from certain derivative and foreign currency activities in the quarter were $92 million. Net earnings also included a pretax loss of $20 million, reflecting guaranty fund assessments of $14 million and Japan branch conversion costs of $6 million. The income tax benefit on non-operating items in the quarter was $45 million. See the "Reconciliation of Net Earnings to Operating Earnings" schedule.

The following discussion includes references to Aflac's non-U.S. GAAP performance measures, operating earnings, operating earnings per diluted share and operating return on equity. These measures are not calculated in accordance with U.S. GAAP. The measures exclude items that the company believes may obscure the underlying fundamentals and trends in insurance operations because they tend to be driven by general economic conditions and events or related to infrequent activities not directly associated with insurance operations. Management uses operating earnings and operating earnings per diluted share to evaluate the financial performance of Aflac's insurance operations on a consolidated basis and believes that a presentation of these measures is vitally important to an understanding of the underlying profitability drivers and trends of Aflac's insurance business.

Aflac defines operating earnings (a non-U.S. GAAP financial measure) as the profits derived from operations. Operating earnings includes interest cash flows associated with notes payable and hedge costs related to foreign currency denominated investments, but excludes certain items that cannot be predicted or that are outside of management's control, such as realized investment gains and losses from securities transactions, impairments, and certain derivative and foreign currency activities; nonrecurring items; and other non-operating income (loss) from net earnings. Nonrecurring and other non-operating items consist of infrequent events and activity not associated with the normal course of the Company's insurance operations and do not reflect Aflac's underlying business performance. Operating earnings per share (basic or dilutive) are the operating earnings for the period divided by the average outstanding shares (basic or dilutive) for the period presented. Operating return on equity excluding foreign currency effect is calculated using operating earnings excluding yen, as reconciled with total U.S. GAAP net earnings, divided by average shareholders' equity, excluding accumulated other comprehensive income. The comparable U.S. GAAP measure is return on average equity as determined using net earnings and average total shareholders' equity. Reconciliations of the foregoing non-GAAP measures to the most comparable U.S. GAAP measures are provided in the schedules accompanying this release.

Due to the size of Aflac Japan, where the functional currency is the Japanese yen, fluctuations in the yen/dollar exchange rate can have a significant effect on reported results. In periods when the yen weakens, translating yen into dollars results in fewer dollars being reported. When the yen strengthens, translating yen into dollars results in more dollars being reported. Consequently, yen weakening has the effect of suppressing current period results in relation to the comparable prior period, while yen strengthening has the effect of magnifying current period results in relation to the comparable prior period. As a result, the company views foreign currency translation as a financial reporting issue for Aflac rather than an economic event to the company or shareholders. Because a significant portion of the company's business is conducted in Japan and foreign exchange rates are outside of management's control, Aflac believes it is important to understand the impact of translating Japanese yen into U.S. dollars. Operating earnings, operating earnings per diluted share "excluding current period foreign currency impact" and operating return on average shareholders' equity excluding foreign exchange are computed using the average yen/dollar exchange rate for the comparable prior year period, which eliminates dollar based fluctuations driven solely from currency rate changes.

The average yen/dollar exchange rate in the first quarter of 2017 was 113.56, or 1.6% stronger than the average rate of 115.35 in the first quarter of 2016. Operating earnings in the first quarter were $676 million, compared with $705 million in the first quarter of 2016. Operating earnings per diluted share decreased .6% to $1.67 in the quarter, compared with $1.68 a year ago. The stronger yen/dollar exchange rate increased operating earnings per diluted share by $.01 for the first quarter. Excluding the impact of the stronger yen, operating earnings per diluted share decreased 1.2%.

Total investments and cash at the end of March 2017 were $120.5 billion, compared with $116.4 billion at December 31, 2016.

In the first quarter, Aflac repurchased $600 million, or 8.5 million of its common shares. At the end of March, the company had 18.3 million shares available for purchase under its share repurchase authorizations.

Shareholders' equity was $20.3 billion, or $51.11 per share, at March 31, 2017, compared with $20.0 billion, or $48.22 per share, at March 31, 2016. Shareholders' equity at the end of the first quarter included a net unrealized gain on investment securities and derivatives of $4.5 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 first quarter was 11.6%.

Shareholders' equity was $17.7 billion, or $44.49 per share (excluding AOCI) at March 31, 2017, compared with $17.1 billion, or $41.15 per share, at March 31, 2016. On an operating basis (excluding AOCI), the annualized return on average shareholders' equity for the first quarter was 15.1%, excluding the impact of foreign currency.

AFLAC JAPAN

In yen terms, Aflac Japan's premium income, net of reinsurance agreements, decreased 1.1% in the first quarter to ¥362.9 billion, with growth in third sector premium offset by reduced first sector premium. Net investment income declined 6.3%, reflecting the stronger yen/dollar exchange rate on dollar-denominated investment income, increased amortized hedge costs on the U.S. dollar investment portfolio and the persistent low-interest-rate environment. Amortized hedge costs on the U.S. dollar investment portfolio totaled $52 million in the quarter, as compared to $32 million in the previous year. Total revenues were down 1.9% to ¥427.7 billion in the first quarter. Pretax operating earnings in yen decreased 5.6% on a reported basis and 5.1% on a currency-neutral basis. The pretax operating profit margin for the Japan segment was 20.5%, compared with 21.3% in the prior year.

Aflac Japan's growth rates in dollar terms for the first quarter were magnified as a result of the stronger yen/dollar exchange rate. Premium income, net of reinsurance agreements, increased .5% to $3.2 billion in the first quarter. Net investment income, which includes amortized hedge costs on foreign investments, decreased 5.4% to $557 million.

Total revenues declined slightly by .4% to $3.8 billion. Pretax operating earnings declined 4.7% to $769 million.

In the first quarter, total new annualized premium sales decreased 29.2% to ¥22.1 billion, or $194 million. Third sector sales, which include cancer, medical and income support products increased 7.6% to ¥19.6 billion in the quarter. Total first sector sales, which include products such as WAYS and child endowment, were down 81.3% in the quarter, reflecting the company's actions to reduce the sale of first sector savings products that are more interest-sensitive.

AFLAC U.S.

Aflac U.S. premium income increased 1.7% to $1.4 billion in the first quarter. Net investment income was up 2.0% to $178 million. Total revenues increased 1.7% to $1.6 billion. The pretax operating profit margin for the U.S. segment was 19.7%, compared with 21.5% a year ago. Pretax operating earnings were $310 million, a decrease of 6.7% for the quarter. Results reflect first quarter 2017 investments in the U.S. platform as well as favorable benefit ratios in the first quarter 2016.

Aflac U.S. total new annualized premium sales increased 1.7% in the quarter to $333 million. Additionally, persistency in the quarter was 77.5%, compared with 76.6% a year ago.

DIVIDEND

The board of directors declared the second quarter cash dividend. The second quarter dividend of $.43 per share is payable on June 1, 2017, to shareholders of record at the close of business on May 24, 2017.

OUTLOOK

Commenting on the company's results, Chairman and Chief Executive Officer Daniel P. Amos stated: "We are pleased with the company's overall performance for the quarter. Our results for the first quarter are consistent with what we communicated on our December outlook call. Despite the persistent low-interest-rate environment, Aflac Japan, our largest earnings contributor, generated solid financial results. In yen terms, results on an operating basis were in line with our expectations for the quarter. Additionally, our operation in Japan produced better-than-expected third sector sales results. As we've communicated, we continue to believe the long-term compound annual growth rate for third sector product sales will be in the range of 4% to 6%.

"Turning to our U.S. operations, we are pleased with the financial performance and continued strength in profitability. Our results on an operating basis reflect ongoing investment in our platform and are in line with our expectations. As we've communicated, we anticipate a long-term compound annual growth rate of 3% to 5% in new annualized premium sales. I want to reiterate that as we look ahead, we believe the strategy for growth we implemented in both our career and broker channels is the right one, and we will continue to make tactical adjustments to meet our long-term growth objectives.

"We remain committed to maintaining strong capital ratios on behalf of our policyholders. We believe our financial strength in Japan positions us to repatriate in the range of ¥120 to ¥140 billion to the U.S. for the calendar year 2017, assuming capital conditions remain stable. We continue to anticipate that we'll repurchase in the range of $1.3 to $1.5 billion of our shares in 2017, front-end loaded in the first half of the year. As is always the case, this assumes stable capital conditions and the absence of compelling alternatives. 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.

"I want to reiterate our 2017 earnings guidance. Our first quarter results put us squarely on track to produce stable operating earnings per diluted share of $6.40 to $6.65, assuming the average exchange rate in 2016 of 108.70 yen to the dollar. If the yen averages 105 to 115 to the dollar for the second quarter, we would expect operating earnings, a non-U.S. GAAP measure, to be approximately $1.55 to $1.70 per diluted share in the second quarter. As always, we are working very hard to achieve our earnings-per-share objective while also ensuring we deliver on our promise to policyholders."