Tax reform has had a major impact on the current earnings season, as just about every company stands to see changes to its tax situation as a result of new rules on foreign earnings and lower corporate tax rates. Aflac (NYSE: AFL) is in an unusual situation, because even though most U.S. investors know the company as a provider of supplemental insurance products to workers throughout the country, Aflac gets most of its revenue from its Japanese business. That has dramatic implications for how new tax laws will affect the insurer in 2018 and beyond.
Coming into Wednesday's fourth-quarter financial report, Aflac investors believed that the company's top line would take a big hit, but earnings were expected to be solid. The insurer got a nice boost from tax reform, and even when you take out that one-time impact, solid bottom-line performance on an adjusted basis set the stage for a good start in 2018. Let's look more closely at Aflac and how it did to finish 2017.
Image source: Aflac.
Aflac gets a gift
Aflac's fourth-quarter results were mixed, as most shareholders had expected. Revenue plunged 9% to $5.42 billion, but that was slightly less dramatic than the roughly 10% decline that most of those following the stock were looking to see. Net income more than tripled to $2.4 billion. After adjusting for special items, adjusted operating earnings of $1.63 per share were $0.08 better than the consensus among investors.
Tax reform was a huge part of the reason Aflac's bottom line rose so much. The company posted a $1.7 billion estimated benefit from tax reform, stemming in large part from expected lower tax rates on repatriated earnings from its Japanese unit. Aflac has been unusual in that it has typically brought back some capital from its overseas business even in the face of the higher tax rates that prevailed under previous law.
The weaker yen again played a role in hurting Aflac's revenue. The yen fell about 3% in the fourth quarter compared to the year-earlier period, with the dollar rising from 109.10 yen to 112.98 yen over that span. Aflac blamed the yen for $0.03 per share in operating earnings, which was a smaller impact than the insurer has seen in previous periods.
Aflac's restructuring of its Japanese operations continued to weigh on performance as well. Local-currency premium income fell 3.3% in the quarter, with the insurer's anticipated pullback from first-sector savings products within Japan weighing on the company's ability to pick up new business in the more lucrative third-sector cancer, medical, and income support product category. New annualized premium sales were down 8% in local terms, and it took a rise in net investment income to offset some of the falling fundamental performance for the Japanese unit.