) third-quarter 2012 operating earnings per share of $1.77
modestly exceeded the Zacks Consensus Estimate of $1.66 and the
year-ago quarter's earnings of $1.65. Operating earnings improved
7.9% year over year to $831 million. A slightly weak yen/dollar
exchange rate had nil impact on the operating earnings.
Operating earnings in the reported quarter excluded after-tax
negative impact of realized investment gains from securities
transactions and impairments of $124 million or 26 cents per
share compared with $112 million or 23 cents per share in the
year-ago quarter. Additionally, a positive impact of derivative
and hedging activities worth $62 million or 13 cents per share
affected the operating earnings in the reported quarter, as
opposed to the negative impact of $146 million or 31 cents per
share recorded in the year-ago period.
Including one-time items, Aflac's GAAP net income in the
reported quarter surged 38.1% to $1.02 million or $2.16 per share
against $736 million or $1.57 per share in the year-ago period.
Total acquisition and operating expenses moved up 4.2% year over
year to $1.44 billion, while benefits and claims spurted 11.8%
year over year to about $3.93 billion. Meanwhile, lower tax rate
raised operating earnings by $17.5 million or 4 cents a
Total revenue for the reported quarter augmented 14.4% year
over year to $6.85 billion, also surpassing the Zacks Consensus
Estimate of $6.43 billion. Despite the ongoing derisking
activities, weak yen and the low-rate environment, total revenue
benefited from consistent improvement in the U.S. and Japan.
While Aflac Japan contributed 80% to the total revenue, Aflac
U.S. contributed the remaining 20%.
Total revenue in Japan increased 8.9% year over year to $5.1
billion. Reflecting the accelerated sales from bank channel and
WAYS product but partially offset by weak average yen, premium
income from the Japanese operations, in terms of dollars, was up
9.6% year over year to $4.4 billion in the reported quarter.
Net investment income from the Japanese operations climbed
2.7% year over year to $731 million. The growth was primarily
mitigated by a weak yen/dollar exchange rate, which was 78.64, or
1.1% weaker than the average rate of 77.78 in the year-ago
quarter. However, higher benefit ratio, weak yen and other
expenses resulted in pre-tax operating earnings in Japan of $994
million, dipping 2.5% over the prior-year quarter.
Aflac U.S. generated revenues of $1.4 billion, up 5.2% over
the prior-year quarter. Net investment income saw an uptick of
3.5% year over year to $153 million. Premiums from the U.S.
operations were up 5.2% year over year to $1.3 billion. Given the
lingering weakness in the U.S. and limited growth in new sales,
total new annualized sales slipped 1.5% year over year to $335
million as more than 90% of the accounts come from the small
Subsequently, pre-tax operating earnings in the U.S. spiked
21.5% year over year to $260 million, while persistency improved
to 76.9% from 75.9% in the year-ago quarter.
As of September 30, 2012, total investment and cash were
$124.2 billion compared with $103.46 billion at 2011-end, while
shareholders' equity totaled $16.0 billion as against $13.50
billion during the same comparable period. Shareholders' equity
per share was $34.10 at the end of the reported quarter, up from
$27.76 per share reported at the end of 2011 and $30.29 per share
in the prior quarter.
At the end of the reported quarter, Aflac projected its
risk-based capital ratio in the range of 575-600%, 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
$2.3 billion as compared with $1.5 billion in the prior
Meanwhile, annualized return on average shareholders' equity
for the reported quarter was 27.0% against 13.9% 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 25.2%, up from 24.0%
in the previous quarter.
Concurrent with the release of third quarter's result, Aflac
revised its 2012 outlook. The company expects revenues from Aflac
Japan to increase about 30-35% in 2012, way higher than the prior
forecast of 10%. The revenue projection for Aflac U.S. is
expected to be flat over 2011, lower than the prior estimate of
3-8% growth. 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.
While management expects sales to improve going ahead, as the
majority of the enrolments are scheduled to occur during the
fourth quarter, reduction in the discounted advance premium rate,
which was effective on October 22, 2012, could pose
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 $6.58-6.63 per share for
2012, higher than the prior band of $6.45-6.52 per share based on
low annual effective tax rate.
Based on this exchange rate assumption, management provided
its fourth quarter earnings expectation in the range of
$1.46-1.51 per share. Additionally, total revenue is anticipated
in the band of 0-15%. Management also plans to repurchase
shares worth $100 million in the upcoming quarter.
Excluding currency fluctuations, Aflac anticipates the
earnings growth to improve by 4-7% in 2013.
Concurrently, the board of Aflac announced a 6.1% hike in its
regular cash dividend to 35 cents from the prior 33 cents per
share, which is payable on December 3, 2012 to its shareholders
of record as on November 14, 2012. This marks the 30
consecutive year of dividend raise. Last October, the company had
hiked its dividend by 10% to 33 cents.
Earlier, on September 4, 2012, Aflac paid a dividend of 33
cents per share to its shareholders of record as on August 15,
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
However, the near-term outlook remains cautious, given the
effect of portfolio derisking activities and the continued
low-interest-rate environment in Japan, which is also reflected
in the company's guidance. Yet, we believe that Aflac will gather
momentum with the improvement in economy in the long-term,
negating 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 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
) is slated to release its results after the closing bell on
October 31, 2012.
AFLAC INC (AFL): Free Stock Analysis Report
UNUM GROUP (UNM): Free Stock Analysis Report
To read this article on Zacks.com click here.