Aflac Inc.’s (AFL) first-quarter 2012 operating
earnings per share of $1.74 outpaced both the Zacks Consensus
Estimate of $1.65 and the year-ago quarter’s earnings of $1.62.
Operating earnings climbed 6.3% year over year to $814 million. A
stronger yen/dollar exchange rate and higher investment income
related to portfolio de-risking boosted the operating earnings per
share by 4 cents and 5 cents, respectively.
Operating earnings in the reported quarter excluded after-tax
negative impact of realized investment losses from securities
transactions and impairments of $81 million or 17 cents per share
compared with $357 million or 75 cents per share in the year-ago
quarter. This was partially offset by the positive impact of
derivative and hedging activities worth $52 million or 11 cents per
share in the reported quarter, as opposed to the negative impact of
$19 million or 4 cents per share recorded in the year-ago
period.
Including one-time items, Aflac’s GAAP net income for the
reported quarter surged over 100% to $785 million or $1.68 per
share against $389 million or 83 cents per share in the year-ago
period. Total acquisition and operating expenses spurted 6.8% year
over year to $1.40 billion, while benefits and claims increased
13.2% year over year to about $3.65 billion.
Total revenue for the reported quarter spiked up 21.9% year over
year to $6.24 billion, slivering past the Zacks Consensus Estimate
of $6.2 billion. Despite the ongoing derisking activities, total
revenue benefited from strengthening of yen against the dollar
along with consistent improvement in the U.S. and
better-than-expected performance in Japan. While Aflac Japan
contributed 78% to the total revenue, Aflac U.S. contributed the
remaining 22%.
Total revenue in Japan increased 12.0% year over year to $4.9
billion. Reflecting the stronger average yen, premium income from
the Japanese operations in terms of dollars was up 12.0% year over
year to $4.1 billion in the reported quarter.
Net investment income from the Japanese operations increased
12.5% year over year to $730 million, primarily spurred by a
stronger yen/dollar exchange rate, which was 79.59, or 3.4%
stronger than the average rate of 82.32 in the year-ago quarter.
Consequently, pre-tax operating earnings in Japan climbed 6.8% year
over year to $1.0 billion.
Besides, 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 5.5% year over year to $152 million.
Premiums from the U.S. operations were up 5.2% year over year to
$1.2 billion. Despite the lingering weakness in the U.S., total new
annualized sales climbed 4.5% year over year to $351 million as the
broker channel showed improvement and are taking up initiatives to
reach out to the brokers of the large-case employer market, thereby
outperforming for the fifth consecutive quarter.
Subsequently, pre-tax operating earnings in the U.S. climbed
8.1% year over year to $271 million, while persistency improved to
74.7% from 73.0% in the year-ago quarter.
Financial Update
As of March 31, 2012, total investment and cash were $103.1
billion compared with $103.46 billion at 2011-end, while
shareholders' equity totaled $13.64 billion against $13.50 billion
at the end of 2011. Shareholders' equity per share was $29.19 at
the end of the reported quarter, up from $27.76 per share reported
at the end of 2011.
At the end of the reported quarter, Aflac projected its
risk-based capital ratio in the range of 500–540%, compared with
493% at 2011-end, while its solvency ratio in Japan also witnessed
considerable improvement. During the reported quarter, net
unrealized gain on investment securities and derivatives were $1.4
billion as compared with $1.2 billion at 2011-end.
Annualized return on average shareholders’ equity for the
reported quarter was 23.6% against 16.6% 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 27.1%, up from 22.7% in the
previous quarter.
On February 8, 2012, Aflac announced the pricing of long-term
fixed rate notes worth $750 million in two tranches. Ratings agency
A.M. Best assigned debt ratings of “a-” to the notes with a stable
outlook. One set of 5-year senior notes are priced at par value of
$400 million with a coupon rate of 2.65%. These notes are issued at
a price of $99.911 that should generate yield of 2.669%.
The other tranche of 10-year fixed rate senior notes are priced
at par value of $350 million with a coupon rate of 4.00%. These
notes are issued at a price of $99.820 and are expected to yield
4.022%. Management plans to use the proceeds from the sale of these
notes to repay Aflac’s 1.87% Samurai notes worth $347 million (26.6
billion yen) that is due in June 2012. Besides, the remaining
amount of the proceeds is expected to inject ample liquidity by
utilizing funds for general corporate and capital purposes.
Guidance
Concurrent with the release of first quarter’s result, Aflac
revised its outlook for 2012. The company expects Aflac Japan to
grow by about 10% in 2012, way higher than the prior band of -2% to
5%. The revenue projection for Aflac U.S. revenue is reiterated at
3–8%.
Besides, management also raised its earnings guidance for 2012
in the range of 3–6% over 2011 from the prior estimate of 2–5%,
reflecting the impact of new accounting for deferred acquisition
cost (DAC) by approximately 5 cents per share and portfolio
derisking. Accordingly, the earnings growth stands within
$6.46–6.65 per share for 2012. Aflac anticipates the earnings
growth to improve further in 2013.
Dividend Update
Concurrently, the board of Aflac announced a regular cash
dividend of 33 cents per share to be payable on June 1, 2012 to its
shareholders of record as on May 16, 2012.
Earlier, on March 1, 2012, Aflac paid a dividend of 33 cents per
share to its shareholders of record as on February 15, 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 a stable economy in the
long term will gather momentum 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 #4, implying a short-term
Sell rating.
Meanwhile, Aflac’s peer Unum Group (UNM) is
slated to release its results after the closing bell on May 1,
2012, while another peer Catalyst Health Solutions
Inc. (CHSI) is yet to declare its earnings schedule for
the first quarter of 2012.
AFLAC INC (AFL): Free Stock Analysis Report
CATALYST HEALTH (CHSI): Free Stock Analysis Report
UNUM GROUP (UNM): Free Stock Analysis Report
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