Aflac Incorporated today reported its fourth quarter results.
Reflecting the weaker yen/dollar exchange rate, revenues rose 6.6% to $6.4 billion in the fourth quarter of 2012, compared with $6.0 billion in the fourth quarter of 2011. Net earnings were $581 million, or $1.24 per diluted share, compared with $538 million, or $1.15 per share, a year ago.
Net earnings in the fourth quarter of 2012 included after-tax realized investment losses, net of realized investment gains, of $111 million, or $.23 per diluted share, compared with net after-tax losses of $146 million, or $.30 per diluted share, a year ago. After-tax realized investment losses in the quarter were $217 million, or $.45 per diluted share. These losses primarily resulted from impairments taken on securities issued by the Republic of Tunisia and UniCredit SpA (HVB Funding Trusts). After-tax realized investment gains from securities transactions in the quarter were $76 million, or $.16 per diluted share. On an after-tax basis, hedge costs related to dollar investments of Aflac Japan were $3 million in the quarter, or $.01 per diluted share. Realized after-tax net investment gains from other derivative and hedging activities in the quarter were $33 million, or $.07 per diluted share.
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 before realized investment gains and losses from securities transactions, impairments, and derivative and hedging activities, as well as nonrecurring items. Aflac's derivative activities include: foreign currency, interest rate and credit default swaps in variable interest entities that are consolidated; foreign currency swaps associated with the company's senior and subordinated notes; and foreign currency forwards used in hedging foreign exchange risk on U.S. dollar-denominated securities. 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 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 a limited number of transactions, which includes the Aflac Japan dollar investment program, the company does not actually convert yen into dollars. As a result, Aflac views foreign currency as a financial reporting issue and not as 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.
Operating earnings in the fourth quarter were $697 million, compared with $684 million in the fourth quarter of 2011. Operating earnings per diluted share rose 2.1% to $1.48 in the quarter, compared with $1.45 a year ago. The weaker yen/dollar exchange rate decreased operating earnings per diluted share by $.04 for the fourth quarter. Excluding the impact from the weaker yen, operating earnings per share increased 4.8%.
For the full year, total revenues were up 14.4% to $25.4 billion, compared with $22.2 billion a year ago. Net earnings were $2.9 billion, or $6.11 per diluted share, compared with $1.9 billion, or $4.12 per share, in 2011. Operating earnings for the full year were $3.1 billion, or $6.60 per diluted share, compared with $2.9 billion, or $6.27 per diluted share, in 2011. Operating earnings per diluted share rose 5.3% for the year. For the year, the yen/dollar exchange rate was relatively flat. Excluding a $.01 per share benefit from the impact from foreign currency, operating earnings per diluted share rose 5.1% for the year.
Total investments and cash at the end of December 2012 were $118.2 billion, compared with $124.2 billion at September 30, 2012. Although negatively impacted by the weaker yen, total investments and cash continued to benefit from strong cash flows.
In the fourth quarter and for the full year, Aflac repurchased 1.9 million shares of its common stock. At the end of December, the company had 22.4 million shares available for purchase under its share repurchase authorization.
Shareholders' equity was $16.0 billion at December 31, 2012, which was unchanged from September 30, 2012. Shareholders' equity at the end of the fourth quarter included a net unrealized gain on investment securities and derivatives of $2.6 billion, compared with a net unrealized gain of $2.3 billion at the end of September 2012. Shareholders' equity per share was $34.16 at December 31, 2012, compared with $34.10 per share at September 30, 2012. The annualized return on average shareholders' equity in the fourth quarter was 14.5%. On an operating basis (excluding total net realized gains/losses in net earnings, and unrealized investment and derivative gains/losses in shareholders' equity), the annualized return on average shareholders' equity was 20.6% for the fourth quarter.
Aflac Japan's total revenues in yen were up 10.5% in the fourth quarter of 2012. Premium income in yen rose 11.2%, benefiting from strong sales of WAYS, Aflac Japan's unique hybrid whole-life product. Net investment income increased 5.2%. The pretax operating profit margin decreased from 18.8% in the fourth quarter of 2011 to 17.7%, and pretax operating earnings in yen increased 4.1%. For the year, premium income in yen increased 9.9%, and net investment income increased 6.1%. Total revenues in yen were up 9.4%, and pretax operating earnings grew 2.0%.
For the fourth quarter, Aflac Japan's results in dollar terms were suppressed by the weaker yen/dollar exchange rate. The average yen/dollar exchange rate in the fourth quarter was 80.93, or 4.4% weaker than the average rate of 77.35 in the fourth quarter of 2011. For the full year, Aflac Japan's results in dollar terms were not materially impacted by the exchange rate. For the full year, the average exchange rate was 79.81, compared with 79.75 in 2011.
Despite the weaker average yen in the fourth quarter, premium income in dollars rose 6.1% to $4.4 billion. Net investment income in the fourth quarter was $711 million, or .3% higher than 2011. Total revenues increased 5.4% to $5.1 billion. Pretax operating earnings declined slightly by .5% to $906 million. For the full year, premium income was $17.2 billion, or 9.8% higher than a year ago. Net investment income rose 5.8% to $2.8 billion. Total revenues were up 9.3% to $20.1 billion. Pretax operating earnings were $3.9 billion, or 2.0% higher than a year ago.
In the fourth quarter, new annualized premium sales rose 1.5% to ¥49.3 billion, or $609 million. During the same period, bank channel sales increased 21.4% to ¥20.0 billion, primarily reflecting the strong sales of WAYS. Sales of WAYS increased 20.7% in the fourth quarter.
For the full year, total new annualized premium sales were up 30.8% to ¥210.6 billion, or $2.6 billion.
Aflac U.S. total revenues rose 5.8% to $1.4 billion in the fourth quarter. Premium income increased 5.5% to $1.3 billion, and net investment income was up 4.4% to $156 million. The pretax operating profit margin was 14.6%, which was unchanged from a year ago. Pretax operating earnings were $208 million, an increase of 5.9% for the quarter. For the year, total revenues were up 5.4% to $5.6 billion and premium income rose 5.4% to $5.0 billion. Net investment income increased 4.2% to $613 million. Pretax operating earnings were $997 million, an increase of 10.3% from a year ago.
Aflac U.S. total new annualized premium sales decreased .7% to $444 million for the quarter. For the full year, total new sales increased .8% to $1.5 billion. Persistency improved to 77.1%, compared with 76.2% a year ago.