Aflac Inc. 's ( AFL )
second-quarter 2012 operating earnings per share of $1.61 came in
line with the Zacks Consensus Estimate, but it modestly surpassed
the year-ago quarter's earnings of $1.55. Operating earnings
climbed 3.9% year over year to $755 million. A stronger yen/dollar
exchange rate boosted the operating earnings by 1 cent per
share.
Operating earnings in the reported quarter excluded after-tax
negative impact of realized investment losses from securities
transactions and impairments of $228 million or 49 cents per share
compared with $480 million or $1.03 per share in the year-ago
quarter. Additionally, a negative impact of derivative and hedging
activities worth $44 million or 9 cents per share affected the
operating earnings in the reported quarter, as opposed to the
positive impact of $27 million or 6 cents per share recorded in the
year-ago period.
Including one-time items, Aflac's GAAP net income in the
reported quarter surged 76.6% to $483 million or $1.03 per share
against $274 million or 58 cents per share in the year-ago period.
Total acquisition and operating expenses moved up 4.8% year over
year to $1.40 billion, while benefits and claims spurted 13.7% year
over year to about $3.76 billion.
Total revenue for the reported quarter spiked up 16.0% year over
year to $5.9 billion, but lagged the Zacks Consensus Estimate of
$6.23 billion. Despite the ongoing derisking activities and the
low-rate environment, total revenue benefited from modest
strengthening of yen against the dollar along with consistent
improvement in the U.S. and Japan. While Aflac Japan contributed
83% to the total revenue, Aflac U.S. contributed the remaining
17%.
Total revenue in Japan increased 11.2% year over year to $4.9
billion. Reflecting the stronger average yen and accelerated sales
from bank channel and WAYS product, premium income from the
Japanese operations in terms of dollars was up 11.8% year over year
to $4.2 billion in the reported quarter.
Net investment income from the Japanese operations increased
8.6% year over year to $691 million, primarily spurred by a
stronger yen/dollar exchange rate, which was 80.19, or 1.7%
stronger than the average rate of 81.57 in the year-ago quarter.
Consequently, pre-tax operating earnings in Japan climbed 4.2% year
over year to $964 million.
Aflac U.S. generated revenues of $1.4 billion, up 5.2% over the
prior-year quarter. Net investment income from the U.S. operation
saw an uptick of 3.6% year over year to $153 million. Premiums from
the U.S. operations were up 5.5% year over year to $1.3 billion.
Despite the lingering weakness in the U.S., total new annualized
sales climbed 1.5% year over year to $359 million as the broker
channel showed improvement and are taking up initiatives to reach
out to the brokers of the large-and small-case employer markets,
thereby outpacing for the sixth consecutive quarter.
Subsequently, pre-tax operating earnings in the U.S. climbed
6.3% year over year to $258 million, while persistency improved to
76.6% from 75.2% in the year-ago quarter.
Financial Update
As of June 30, 2012, total investment and cash were $109.3
billion compared with $103.46 billion at 2011-end, while
shareholders' equity totaled $14.2 billion as against $13.50
billion at the end of 2011. Shareholders' equity per share was
$30.37 at the end of the reported quarter, up from $27.76 per share
reported at the end of 2011 and $29.19 per share in the prior
quarter.
At the end of the reported quarter, Aflac projected its
risk-based capital ratio in the range of 560-600%, compared with
493% at 2011-end, while its solvency ratio in Japan is also at the
higher end of 500-600% target. During the reported quarter, net
unrealized gain on investment securities and derivatives were $1.5
billion as compared with $1.4 billion in the prior quarter.
However, annualized return on average shareholders' equity for
the reported quarter was 13.9% against 23.6% in the prior quarter.
On an operating basis (excluding realized investment losses and the
impact of ASC 815 on net earnings, and unrealized investment
gains/losses in shareholders' equity) Aflac's return on average
shareholders' equity came in at 24.0%, up from 27.1% in the
previous quarter.
Guidance
Concurrent with the release of second quarter's result, Aflac
reiterated its 2012 outlook. The company expects revenues from
Aflac Japan to increase about 10% in 2012, way higher than the
prior band of -2% to 5%. The revenue projection for Aflac U.S. is
reiterated at 3-8%. Annual premium sales are expected to be within
22-25% in 2012, while new annualized sales are projected to grow by
0-5% in the second half of 2012, reflecting difficult comps.
However, management expects sales to improve going ahead, as the
majority of the enrolments are scheduled to occur during the fourth
quarter.
Additionally, management reaffirmed its earnings guidance for
2012 in the range of 3-6% over 2011, excluding the effect of
foreign currency fluctuations. This also reflects the impact of new
accounting for deferred acquisition cost (DAC) by approximately 5
cents per share and portfolio derisking.
Accordingly, if the yen averages 80 against dollar, the earnings
growth is expected to be within $6.45-6.52 per share for 2012, at
the lower-end of prior band of $6.46-6.65 per share based on low
investment yields.
Based on this exchange rate assumption, management provided its
third quarter earnings expectation in the range of $1.64-1.69 per
share. Excluding currency fluctuations, Aflac anticipates the
earnings growth to improve by 4-7% in 2013.
Dividend Update
Concurrently, the board of Aflac announced a regular cash
dividend of 33 cents per share, which is payable on September 4,
2012 to its shareholders of record as on August 15, 2012.
Earlier, on June 1, 2012, Aflac paid a dividend of 33 cents per
share to its shareholders of record as on May 16, 2012. The company
had hiked its dividend by 10% to 33 cents in October 2011.
Our Take
Over the years, Aflac has been significantly focusing on
strengthening its insurance operations through successful product
launches and the expansion of its distribution system, which has
been significantly contributing to its strong sales results. This
has also enabled the company to generate healthy capital ratios and
cash position, while raising dividends from time to time. However,
higher operating expenses continue to be a deterrent for desired
advancement.
Although the near-term outlook remains cautious, given the
effect of portfolio derisking activities and the continued
low-interest-rate environment in Japan that is also reflected in
the company's guidance, we believe that the will gather momentum
economy in the long term and negate interest and currency risk,
thereby providing more profitable investment opportunities to
Aflac. Going ahead, the company's strong capital and surplus cash
position is expected to mitigate balance sheet risks and provide
liquidity cushion in the long run, as well as return value to
shareholders consistently.
Hence, we continue to retain our Neutral stance on the stock,
with a Zacks Rank #3, implying a short-term Hold rating. Meanwhile,
Aflac's peer Unum Group ( UNM ) is
slated to release its results after the closing bell on August 1,
2012.
AFLAC INC (AFL): Free Stock Analysis Report
UNUM GROUP (UNM): Free Stock Analysis Report
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