We reiterated our recommendation on
Aflac Inc.
(
AFL
) at Neutral based on the company's slow but steady growth amid
interest rate volatility and de-risking of the investment
portfolio.
The company's 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.
However, total revenue for the reported quarter jumped 16.0% year
over year to $5.9 billion, but lagged the Zacks Consensus Estimate
of $6.23 billion.
Aflac's strong brand name and solid business model enabled it to
improve earnings considerably faster than other life and health
insurers. Most significantly, the company is a prime insurer in
Japan in terms of individual policies in force, contributing over
80% to Aflac's total revenue. The company continues to capitalize
on its rapidly growing bank channels along with cancer and medical
insurance policies. The optimism is also evident from management's
expectation of about 10% revenue growth in Japan in 2012.
Aflac has been achieving its earnings target for the past 22
years, which is reflected in its consistent dividend increment. The
company's strong brand name and solid business model enabled it to
improve earnings considerably faster than other life and health
insurers, such as
Unum Group
(
UNM
) and
Employers Holdings Inc.
(
EIG
).
Further, Aflac's National Association of Insurance Commissioners
(NAIC) risk-based capital ratio was estimated in the range of
560-600% in the first half of 2012, improving from 493% in 2011,
reflecting the company's stable returns. It is also impressive
given the ongoing de-risking program. These positives are also
validated by the rating agencies, Fitch and A.M. Best, who cast a
stable outlook on Aflac's financial strength.
However, given the cautious consumption levels, sluggish credit
markets and currency fluctuations that affected both the
institutional and individual clients; Aflac's expenses continue to
climb while significantly negating top-line growth and reducing
margins. Additionally, investment losses and lower yields
exacerbate financial risk. Increasing expenses, portfolio
de-risking and the prevalent low rate environment have further
impelled management to peg its earnings growth guidance at
low-to-mid single digits in 2012 and 2013.
Further, Aflac U.S. continues to experience sluggish life
insurance sales due to low demand, recent healthcare reforms and
reduced client activity admist the ongoing market volatility. The
company's insurance brokerage distribution initiative is yet to
produce any significant growth given poor recruitment and
inadequate training infrastructure. Difficult comps have
subsequently pegged the new annualized sales at a sluggish growth
of 0-5% in the second half of 2012.
Based on the above factors, the Zacks Consensus Estimate is
currently pegged at $1.65 per share, down about 1% year over year,
for the third quarter of 2012. This is on the lower end of
management's guidance of $1.64-$1.69 per share. Three of the
seventeen firms covering the stock have revised their estimates
upward for the upcoming quarter, while no downward revision was
witnessed. For 2012, earnings are estimated to be $6.52 per share,
up about 3% year over year, and at the high end of the company's
projection of $6.45-6.52 per share.
The quantitative Zacks #3 Rank for Aflac implies a short-term
Hold rating.
AFLAC INC (AFL): Free Stock Analysis Report
EMPLOYERS HLDGS (EIG): Free Stock Analysis
Report
UNUM GROUP (UNM): Free Stock Analysis Report
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