AFL AFLAC Inc

Aflac Inc.’s (AFL) second quarter operating earnings per share of $1.56 came in a couple higher than the Zacks Consensus Estimate of $1.54 but modestly exceeded $1.35 reported in the year-ago quarter. Operating earnings escalated 14.7% year over year to $733 million. A stronger yen/dollar exchange rate helped increase operating earnings per share by 11 cents.

Earnings in the reported quarter excluded after-tax realized investment losses from securities transactions of $480 million or $1.02 per share compared with a gain of $8 million or 2 cents per share in the year-ago quarter.

These were partially offset by the impact of derivative and hedging activities worth $27 million or 6 cents in the reported quarter, as opposed to a negative impact of $66 million or 14 cents recorded in the year-ago period.

Including one-time items, Aflac’s GAAP net income for the reported quarter came in at $280 million or 60 cents per share compared with $581 million or $1.23 per share in the year-ago period. Total acquisition and operating expenses increased 9.8% year over year to $1.33 billion, while benefits and claims climbed 14.8% year over year to about $3.31 billion.

Total revenue for the reported quarter inched up 2.2% year over year to $5.09 billion lagging behind the Zacks Consensus Estimate of $5.69 billion.

Total revenue benefited from strengthening of yen 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%.

Total revenue in Japan increased 16.8% year over year to $4.4 billion. Reflecting the stronger average yen, premium income from the Japanese operations in terms of dollars was up 18.3% year over year to $3.8 billion in the reported quarter.

Net investment income from the Japanese operations increased 7.3% year over year to $636 million primarily due to a stronger yen/dollar exchange rate, which was 81.54, or 12.9% stronger than the average rate of 92.05 in the year-ago quarter.

Aflac U.S. generated revenue of $1.3 billion, up 4.0% over prior-year quarter. Net investment income from the U.S. operation was up 9.7% year over year to $148 million. Premiums from the U.S. operations were up 3.4% year over year to $1.2 billion.

Despite the lingering weakness in the U.S., total new annualized sales rose 5.9% year over year to $353 million as targeted product and field force recruiting initiatives showed some improvement.

Financial Update

As of June 30, 2011, total investment and cash were $93.0 billion compared with $88.4 billion as of March 31, 2011, while shareholders' equity totaled $12.0 billion against $11.0 billion at the end of prior quarter. As of March 31, 2011, Aflac projected its risk-based capital ratio in the range of 480–520%, compared with more than 580% estimated at the end of 2010.

During the reported quarter, net unrealized gain on investment securities and derivatives were $758 million as compared with a net unrealized loss of $21 million at the end of prior quarter.

Annualized return on average shareholders’ equity for the reported quarter was 9.7% as compared with 14.3% 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 26.3%, down from 28.0% in the previous quarter.

Guidance

Concurrent with the second 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 third quarter are expected to be within $1.54–$1.60 per share.

Further, Aflac U.S. expects revenue growth of 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.

Nevertheless, management raised its earnings guidance for 2012 in the range of 2–5% from the prior expectation of lower earnings growth in 2012 over 2011.

Dividend Update

Concurrently, the board of Aflac announced its quarterly cash dividend of 30 cents per share to be paid on September 1, 2011 to its common stockholders of record as of August 17, 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 1.0 million shares during the reported quarter, repurchasing a total of 4.1 million shares in the first half of 2011. Earlier this year, Aflac had projected to repurchase 6–12 million shares in 2011. At the end of the reported quarter, Aflac had 26.3 million shares available for repurchase.

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 a deterrent for desired advancement.

Although near-term outlook remains cautious, given the effect of portfolio derisking activities and the continued low-interest-rate environment in Japan, 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.

Meanwhile, both of Aflac’s peers, Unum Group (UNM) and Catalyst Health Solutions Inc. (CHSI) are expected to release their results after the market closes on August 2, 2011.

 
AFLAC INC (AFL): Free Stock Analysis Report
 
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UNUM GROUP (UNM): Free Stock Analysis Report
 
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