On May 7, we downgraded life and health insurer -
) to Underperform based on its faltering financial growth
Why the Downgrade?
Estimates for Aflac have witnessed a steady decline since its
first-quarter 2013 results on Apr 24. The company's first-quarter
earnings per share of $1.69 comfortably surpassed the Zacks
Consensus Estimate of $1.62, but lagged the year-ago quarter's
earnings of $1.74. Meanwhile, total revenue of $6.21 billion
missed the Zacks Consensus Estimate of $6.27 billion but inched
up 0.5% on a year-over-year basis.
Following a tempered growth outlook, the Zacks Consensus
Estimate for 2013 has gone down 2.7% to $6.17 per share in the
last 30 days. The Zacks Consensus Estimate for 2014 also slid
4.2% to $6.54 per share. With the Zacks Consensus Estimates for
both 2013 and 2014 going down, the company now has a Zacks Rank
Cause for Concern
Aflac's top line remains sufficiently exposed to a challenging
operating environment, particularly in Japan. Sales from its
banks channel, WAYS life policies and other third sector cancer
and medical products (together contributing about 75% to Japan's
top line) decelerated in the first quarter of 2013.
Management's expectation of third sector revenue growth in
Japan in the band of nil to 5% in 2013 further validates the
lackluster results ahead. Despite the re-pricing initiatives
taken in Apr 2013, Aflac projects a 40-60% decline in the WAYS
sales in the upcoming quarters, after over 124% growth in 2012.
This will severely weigh on the financials of the company.
On the other hand, Aflac's U.S. operations are yet to gain
traction given the deteriorated new annualized sales on the back
of intense competition, low demand and reduced client activity
from larger businesses. Management projectsnew annualized sales
in the U.S. to witness sluggish growth of nil to 5% in 2013,
driven by difficult comps.
Moreover,the company's investment portfolio comprises about
43% in Japanese government bonds, which is being adversely
impacted by the historically low interest-rate environment.The
past few quarters have witnessed significant weaknessin yen as
well, indicating deterioration in the upcoming quarters.
Increasing expenses, lower investment yield and low rate
environment have further impelled management to peg its earnings
growth guidance at low- to mid-single digit in 2013.
Other Financial Stocks That Warrant a Look
While we prefer to avoid Aflac until we see some improvement
in its performance,
Employers Holdings Inc.
Hilltop Holdings Inc.
) carrying a Zacks Rank #1 (Strong Buy) appear impressive.
AFLAC INC (AFL): Free Stock Analysis Report
AMERISAFE INC (AMSF): Free Stock Analysis
EMPLOYERS HLDGS (EIG): Free Stock Analysis
HILLTOP HLDGS (HTH): Free Stock Analysis
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