On May 12, we issued an updated research report on Aflac Inc.AFL .
Aflac's first-quarter 2015 operating earnings lagged the Zacks Consensus Estimate and also came in below the year-ago quarter figure, primarily due to a weak yen/dollar exchange rate. Japan revenues witnessed a sharp fall owing to decelerated sales from the WAYS and endowment products.
However, Aflac has been achieving its earnings target for the past 25 years. The company has also been increasing its dividend payout consistently over the last 32 years. Additionally, Aflac has been able to improve its persistency and expense ratio, which in turn, resulted in consistent profit margin expansion. Lower claims and operating expenses (down 8.1% in the first quarter) as well as decreased loss ratios further supported margin growth.
Despite the challenging economic conditions that have adversely affected the insurance industry in both Japan and the U.S., Aflac continues to enjoy a fairly liquid position. This has helped the company in effective capital deployment.
Aflac's strong brand name and solid business model have enabled it to improve earnings considerably faster than other life and health insurers. The company is one of the prime insurers in Japan in terms of individual policies in force. Japan is an integral part of Aflac's operations as is evident from the fact that revenues from this country accounted for 70% of the company's total revenue in the first quarter. Aflac, therefore, continues to strengthen its Japanese operations and premium income through new product introductions. The company launched the New Cancer
DAYS product in Sep 2014 with multiple cancer occurrence benefits and lower premiums, which led to 118% growth in cancer insurance sales in the first quarter. Aflac has also been capitalizing on the sales of its new medical product range that targets the under-penetrated age group - within 20-40 years - and expects sales to pick up in the upcoming quarters.
Rating affirmations or upgrades from credit rating agencies play an important part in instilling investor confidence in the stock as well as in maintaining its creditworthiness in the market. Aflac's stability and healthy risk-based capital continue to imbibe confidence among ratings agencies as well.
However, the ongoing weak consumption levels, sluggish credit markets and currency fluctuations affected both the institutional and individual clients of Aflac, particularly in Japan. Since Japan is a major contributor to the company's revenues, any adversity or a challenging operating environment in the country directly affects its top line.
Aflac's expenses continue to increase as well, thereby significantly negating top-line growth and slicing margins. Further, Aflac's indulgence in de-risking activities has shifted its portfolio toward investments with lesser risk and lower yields, which will further diminish investment income.
These factors, along with strong sales of low-margin general health products in Japan, have deteriorated the benefit ratio in the past couple of years and hence, have adversely affected margins.
Aflac continues to be harshly hit by the intense economic volatility, continued fluctuation of the yen against the dollar, changes in interest rates, changes in credit spreads and defaults, market liquidity and decline in equity price. Although most of the portfolio de-risking has been completed, increased losses in the investment portfolio, higher hedging in currency and interest rates along with tempered growth of margins and capital volatility in Japan are expected to hurt earnings repatriation to the U.S.
Aflac's U.S. operations continue to experience sluggish life insurance sales due to low demand, recent healthcare reforms and reduced client activity from larger businesses that have created a sense of caution on both macro and micro levels.
The company's insurance brokerage distribution initiative has been incapable of generating any significant growth due to poor recruitment and inadequate training infrastructure, thereby reducing its market competence. Additionally, Aflac competes with major organizations such as Blue Cross and Blue Shield ("BCBS") in the U.S., which further adds to its woes. Moreover, loss of a large payroll account, persistent weakness in confidence from small businesses and a few sales associates cast a cautious outlook on the sales opportunities in the U.S. in 2015.
Currently, Aflac carries a Zacks Rank #3 (Hold). Better-ranked stocks in the insurance sector include Heritage Insurance Holdings, Inc. HRTG , Markel Corp. MKL and State Auto Financial Corp. STFC . All of these stocks sport a Zacks Rank #1 (Strong Buy).
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AFLAC INC (AFL): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
