Aflac Incorporated reported its fourth quarter results.

Reflecting the stronger yen/dollar exchange rate, total revenues increased 12.0% to $6.0 billion during the fourth quarter of 2016, compared with $5.3 billion in the fourth quarter of 2015. Net earnings were $751 million, or $1.84 per diluted share, compared with $730 million, or $1.71 per share, a year ago. 

Net earnings in the fourth quarter of 2016 included pretax net realized investment gains of $116 million, or $.29 per diluted share, compared with net pretax gains of $91 million, or $.22 per diluted share, a year ago. Pretax net realized gains from securities transactions and impairments for the fourth quarter amounted to $114 million, or $.28 per diluted share, and were composed of pretax realized investment gains from securities transactions of $128 million, or $.32 per diluted share, and pretax realized investment losses from impairments of $14 million, or $.04 per diluted share. Amortized hedge costs related to certain dollar investments of Aflac Japan on a pretax basis were $62 million in the quarter, or $.15 per diluted share. Realized pretax net investment gains from other derivative and hedging activities in the quarter were $64 million, or $.16 per diluted share. In addition, net earnings included a pretax gain of $70 million, or $.17 per diluted share, from other and nonrecurring items. This $70 million primarily resulted from a foreign currency gain associated with investment activities during the quarter and a loss on the early extinguishment of debt previously disclosed. Income tax on non-operating items in the quarter was $65 million. Beginning in the fourth quarter of 2016, the company adopted an amortized method of accounting for hedge costs.

The following discussion includes references to Aflac's performance measures, operating earnings and operating earnings per diluted share. 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 but excludes 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 derivative and hedging activities; nonrecurring items; and other non-operating income (loss) from net earnings. 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 for certain notes payable and forecasted cash flows denominated in yen. 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.

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 and operating earnings per diluted shares "excluding current period foreign currency impact" 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 fourth quarter of 2016 was 109.10, or 11.4% stronger than the average rate of 121.54 in the fourth quarter of 2015. For the full year, the average exchange rate was 108.70, or 11.3% stronger than the rate of 120.99 a year ago. Aflac Japan's growth rates in dollar terms for the fourth quarter and the full year were magnified as a result of the stronger yen/dollar exchange rate.

Operating earnings in the fourth quarter were $630 million, compared with $668 million in the fourth quarter of 2015, reflecting the impact of a pretax $52 million (¥6 billion) reserve adjustment on a closed block of business. Operating earnings per diluted share decreased 1.3% to $1.54 in the quarter, reflecting the reserve adjustment of $.08 per diluted share, compared with $1.56 a year ago. The stronger yen/dollar exchange rate increased operating earnings per diluted share by $.08 for the fourth quarter. Excluding the impact from the stronger yen, operating earnings per diluted share decreased 6.4%.

Results for the full year of 2016 were also magnified by the stronger yen. Total revenues were up 8.1% to $22.6 billion, compared with $20.9 billion for the full year of 2015. Net earnings for the full year of 2016 were $2.7 billion, or $6.42 per diluted share, compared with $2.5 billion, or $5.85 per diluted share, a year ago. Operating earnings for the full year of 2016 were $2.8 billion, or $6.79 per diluted share, compared with $2.7 billion, or $6.16 per diluted share, in 2015. Excluding the positive impact of $.34 per share from the stronger yen, operating earnings per diluted share increased 4.7% to $6.45 per share for the full year of 2016 and in line with previous guidance.

Total investments and cash at the end of December 2016 were $116.4 billion, compared with $128.9 billion at September 30, 2016.

In the fourth quarter, Aflac repurchased $200 million, or 2.8 million of its common shares. For the full year, the company purchased $1.4 billion, or 21.6 million shares. At the end of December, the company had 26.8 million shares available for purchase under its share repurchase authorizations.

Shareholders' equity was $20.5 billion, or $50.47 per share, at December 31, 2016, compared with $22.8 billion, or $55.84 per share, at September 30, 2016. Shareholders' equity at the end of the fourth quarter included a net unrealized gain on investment securities and derivatives of $4.8 billion, compared with a net unrealized gain of $6.1 billion at the end of September 2016. The annualized return on average shareholders' equity in the fourth quarter was 13.9%. 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 15.6% for the fourth quarter, or 13.7%, excluding the impact of foreign currency. For the full year, operating return on average shareholders' equity, excluding the impact of foreign currency, was 17.3%.

AFLAC JAPAN

In yen terms, Aflac Japan's premium income, net of reinsurance agreements, increased .2% in the fourth quarter. Net investment income decreased 7.6%, as the stronger yen/dollar exchange rate significantly impacted the reported results of Aflac Japan's dollar-denominated investment income, which accounted for approximately 47% of Aflac Japan's fourth quarter investment income. Total revenues were down 1.1% in the fourth quarter. Reflecting the impact of the ¥6 billion reserve adjustment on a closed block of business in the fourth quarter, pretax operating earnings in yen decreased 14.1% on a reported basis and decreased 10.5% on a currency-neutral basis. The pretax operating profit margin for the Japan segment decreased to 19.4% from 22.3% in the prior year. For the full year, premium income in yen increased .8%, and net investment income declined 5.8%. Total revenues in yen were down .3%, and pretax operating earnings in yen decreased 5.7%. On a currency-neutral basis, pretax operating earnings declined 2.0%.

Aflac Japan's growth rates in dollar terms for the fourth quarter were magnified as a result of the significantly stronger yen/dollar exchange rate. Premium income increased 11.7% to $3.4 billion in the fourth quarter. Net investment income increased 2.8% to $629 million. Total revenues increased 10.2% to $4.0 billion. Pretax operating earnings decreased 4.3% to $775 million. For the full year, premium income was $13.5 billion, or 12.4% higher than a year ago. Net investment income increased 4.9% to $2.6 billion. Total revenues were up 11.2% to $16.1 billion. Pretax operating earnings were $3.3 billion, or 5.0% higher than a year ago.

In the fourth quarter, total new annualized premium sales decreased 18.5% to ¥25.8 billion, or $236 million. Third sector sales, which include cancer, medical and income support products increased 1.6% in the quarter. Total first sector sales, which include products such as WAYS and child endowment, decreased 60.2% in the quarter.

For the full year, new annualized premium sales were down 5.9% to ¥113.7 billion, or $1.0 billion. Third sector sales increased 4.1% for the full year.

AFLAC U.S.

Aflac U.S. premium income increased 2.2% to $1.4 billion in the fourth quarter. Net investment income was up 4.0% to $177 million. Total revenues increased 2.6% to $1.5 billion. Reflecting a lower benefit and expense ratio compared to last year's fourth quarter, the pretax operating profit margin for the U.S. segment was 17.0%, compared with 15.8% a year ago. Pretax operating earnings were $262 million, an increase of 10.4% for the quarter. For the full year, total revenues were up 2.2% to $6.2 billion and premium income rose 2.0% to $5.5 billion. Net investment income increased 3.8% to $703 million. Pretax operating earnings were $1.2 billion, 9.7% higher than a year ago. The pretax profit margin for the full year was 19.6%, compared with 18.3% in 2015.

Aflac U.S. total new annualized premium sales decreased 2.9% in the quarter to $483 million. For the full year, total new sales decreased .3% to $1.5 billion.

DIVIDEND

The board of directors declared the first quarter cash dividend. The first quarter dividend of $.43 per share is payable on March 1, 2017, to shareholders of record at the close of business on February 15, 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 year. Despite the pervasive low-interest-rate environment, Aflac Japan, our largest earnings contributor, generated solid financial results. Additionally, our operation in Japan produced strong third sector sales results throughout 2016. As we said during our outlook call last month, 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 strong profitability of Aflac U.S. in 2016. While we were disappointed with sales results for Aflac U.S. in 2016, I want to reiterate that we believe the strategy for growth we adopted in both our career and broker channels is the right one as we look ahead. As we said on last month's outlook call, we anticipate a long-term compound annual growth rate of 3% to 5% in new annualized premium sales. 

"Based on our assessment of the company's capital strength, we repatriated approximately ¥139 billion in 2016, which is consistent with our expectation.  We remain committed to maintaining strong capital ratios on behalf of our policyholders. 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 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 we indicated last quarter, 2016 marked the 34th 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 2017, our guidance remains unchanged since our December outlook call. Our objective is 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. As always, we are working very hard to achieve our earnings-per-share objective while also ensuring we deliver on our promise to policyholders."