AFL AFLAC Inc

Aflac Inc.’s (AFL) first quarter operating earnings per share of $1.63 came in modestly higher than the Zacks Consensus Estimate of $1.52 and $1.41 reported in the year-ago quarter.

Earnings in the reported quarter excluded after-tax realized investment gains from securities transactions of $357 million or 75 cents per share compared with $41 million or 8 cents per share in the year-ago quarter. Additionally, impact of derivative and hedging activities was worth negative $19 million or 4 cents in the reported quarter, as opposed to a positive impact of $11 million or 2 cents recorded in the year-ago period.

Earnings for the reported quarter benefited from top-line growth and a stronger yen/dollar exchange rate that helped increase operating earnings per share by 10 cents.

Including one-time items, Aflac’s GAAP net income for the reported quarter came in at $395 million or 84 cents per share compared with $636 million or $1.35 per share in the year-ago period. Total acquisition and operating expenses increased 5.0% year over year to $1.30 billion, while benefits and claims climbed 12.7% year over year to about $3.22 billion.

Total revenue for the reported quarter inched up 1.0% year over year to $5.12 billion lagging behind the Zacks Consensus Estimate of $5.6 billion. Total revenue benefited from strengthening of yen by 10% against the dollar that was offset by high investment losses resulting from significant investment derisking activities. While Aflac Japan contributed 86% to the total revenue, Aflac U.S. contributed the remaining 14%.

Reflecting the stronger average yen, premium income from the Japanese operations in terms of dollars was up 15.5% year over year to $3.7 billion in the reported quarter. Net investment income from the Japanese operations increased 9.5% year over year to $649 million primarily due to a stronger yen/dollar exchange rate, which was 82.29, or 10.0% stronger than the average rate of 90.49 in the year-ago quarter.

However, Aflac Japan made a provision of $37 million in the reported quarter for claims related to the earthquake and tsunami that hit Japan in March this year. These were partially offset by the $25 million in reserves and reinsurance, while the remaining $12 million adversely impacted the net income. Results also reflected $8 million in operating expenses related to Japan catastrophe.

Net investment income from the U.S. operation was up 8.8% year over year to $144 million. Premiums from the U.S. operations were up 2.5% year over year to $1.2 billion. Despite the consistent sluggish performance in the U.S., total new annualized premium rose 6.3% year over year to $336 million.

Financial Update

As of March 31, 2011, total investment and cash were $88.4 billion compared with $88.2 billion as of December 31, 2010. As of March 31, 2011, Aflac projected its risk-based capital ratio in the range of 500-525%, compared with more than 580% estimated at the end of 2010.

Annualized return on average shareholders’ equity for the reported quarter was 14.3% as compared with 15.7% 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 28.0%, up from 23.3% in the previous quarter.

Outlook for 2011

Concurrent with the first quarter’s result release, Aflac reiterated its outlook for 2011. The company expects operating earnings per share to grow at the lower end of 8-12% in 2011 (an 8% growth would be around $5.97 per share) excluding the impact of the yen. If the yen remains stronger and averages around 80-85 to a dollar for full-year 2011, Aflac anticipates reported earnings in the range $6.09-$6.34 per share.

Additionally, using the same rate assumption, operating earnings in the second quarter are expected to be within $1.51-$1.57 per share.

Further, Aflac US expects revenue growth to a maximum of 5%, given the relatively sluggish improvement in unemployment rates and low consumer activity in the US. However, revenue projection in Aflac Japan ranges from a negative 2% to a positive 3%, in 2011. Moreover, management expects lower earnings growth in 2012 over 2011, given the effect of portfolio derisking activities and the continued low-interest-rate environment in Japan.

Dividend Update

Concurrently, the board of Aflac announced its quarterly cash dividend of 30 cents per share to be paid on June 1, 2011 to its common stockholders of record as of May 18, 2011.

Share Repurchase Update

To retain shareholders confidence, Aflac announced the resumption of its buyback program, which authorized 32.4 million shares available for repurchase as of June 30, 2010. The stock repurchase program had been shelved in 2008 owing to the global market downturn.

Accordingly, the company bought back 3.1 million shares during the reported quarter. Earlier this year, Aflac had projected to repurchase 6–12 million shares in 2011. At the end of the reported quarter, Aflac had 27.3 million shares available for purchases under its share repurchase authorization.

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. However, lower-than-expected growth in the U.S. operations and higher operating expenses continue to be an overhang on the desired advancement.

Although near-term outlook remains cautious, 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 term, as well as return value to shareholders consistently.

While Aflac’s peer Unum Group (UNM) is expected to release its results after the market closes on May 3, rival firm Catalyst Health Solutions Inc. (CHSI) is scheduled to discuss its financials after the market closes on May 4, 2011.

 
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