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Aflac Looks for More Premium Growth

Dan Caplinger, The Motley Fool

Every company likes to grow, and U.S. investors know how supplemental-insurance company Aflac (NYSE: AFL) continually seeks to expand with its clever marketing strategies. Yet as successful as Aflac has been in delivering consistently strong performance over the long run, even the insurance industry goes through boom-and-bust cycles, and the insurance giant wants to find as many ways as it can to play a bigger role in the overall industry.

Coming into Thursday's second-quarter financial report, Aflac investors were resigned to a period of flat earnings and declining revenues. Aflac managed to do a little better than that, but the company is still convinced that it needs to work harder in order to make the most of the opportunities it has in front of it.

Duck holding blue cellphone.

Image source: Aflac.

Aflac deals with a quiet quarter

Aflac's second-quarter results came in largely as expected. Revenue was down 1.4%, to $5.51 billion, which was just a little bit better than the $5.50 billion that most of those following the stock had looked to see. Adjusted net income of $846 million was up 1.3% from year-ago levels, and adjusted earnings of $1.13 per share came in about $0.05 per share ahead of the consensus forecast among investors.

The same dynamic that we've seen in recent periods continued to show up in the second quarter. In Aflac's Japan segment, premium income fell 0.9% in local currency terms, or 1.7% when measured in U.S. dollars. Net investment income was higher by 0.5% in dollar terms, but total revenue for the segment sank 1.4%.

Aflac attributed the sluggish performance to its limited-pay products reaching paid-up status, although profit margin improved somewhat due to favorable claims trends in key business areas. New sales plunged from year-ago levels by 17% to 18%, mostly because the year-ago quarter included the launch of a popular cancer-insurance product in Japan.

In the U.S., investors saw a different story. Net premium income rose 2.3% during the second quarter, and even though investment income was down 1.1% during the period, total revenue picked up 1.9%. However, higher anticipated expenses in the quarter weighed on the bottom line, as pre-tax adjusted earnings came in 0.6% lower than they did a year ago. U.S. sales decreased 2% during the quarter.

Aflac often benefits from its handling of currency risk, and that was again the case this quarter. The company's corporate yen hedging program added $20 million to net investment income on a pre-tax basis.

Why's Aflac looking for more?

CEO Daniel Amos wasn't content with how Aflac did. "While I am pleased with the company's overall financial results and our path toward achieving our annual objectives," Amos said, "we remain focused on investing and executing on initiatives designed to drive future earned premium growth both in the U.S. and Japan." The CEO noted that sales results in the U.S. market were weaker than Aflac had expected.

However, Aflac did have some encouraging words to say. Amos noted that production in the U.S. market tends to be skewed toward the fourth quarter, and that should help the company boost earned premium domestically by 2% to 3% for the full 2019 year.

Aflac's optimism showed up in its guidance. The insurer said that it now believes its full-year earnings will be toward the higher end of its stated range of between $4.10 and $4.30 per share. Aflac also expects to buy back between $1.3 billion and $1.7 billion in stock repurchases this year, helping to boost earnings per share, even when overall net income is flat.

With Aflac's numbers coming in so close to what investors already expected, short-term traders aren't likely to have a dramatic reaction to the news. However, it'll be interesting to see how Aflac works to take greater advantage of its growth opportunities and find new ways to generate premium income.

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