Aflac Inc.’s (AFL) third quarter 2011 operating
earnings per share of $1.66 came in comfortably higher than the
Zacks Consensus Estimate of $1.60 and $1.45 reported in the
year-ago quarter. Operating earnings escalated 13.7% year over year
to $778 million. A stronger yen/dollar exchange rate helped
increase operating earnings per share by 9 cents.
Earnings in the reported quarter excluded after-tax negative
impact of derivative and hedging activities worth $146 million or
31 cents in the reported quarter, as opposed to a positive impact
of $9 million or 2 cents recorded in the year-ago period. This was
partially offset by realized investment gains from securities
transactions and impairments of $112 million or 24 cents per share
compared to a loss of $3 million or 1 cent per share in the
year-ago quarter.
Including one-time items, Aflac’s GAAP net income for the
reported quarter came in at $744 million or $1.59 per share
compared with $690 million or $1.46 per share in the year-ago
period. Total acquisition and operating expenses increased 10.3%
year over year to $1.37 billion, while benefits and claims climbed
13.4% year over year to about $3.52 billion.
Total revenue for the reported quarter spiked up 11.0% year over
year to $5.99 billion, also surpassing the Zacks Consensus Estimate
of $5.88 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 15.5% year over year to $4.69
billion. Reflecting the stronger average yen, premium income from
the Japanese operations in terms of dollars was up 16.3% year over
year to $4.0 billion in the reported quarter. Net investment income
from the Japanese operations increased 11.3% year over year to $695
million primarily due to a stronger yen/dollar exchange rate, which
was 77.78, or 10.2% stronger than the average rate of 85.74 in the
year-ago quarter.
Aflac U.S. generated revenue of $1.3 billion, up 4.0% over the
prior-year quarter. Net investment income from the U.S. operation
was up 7.1% year over year to $147 million. Premiums from the U.S.
operations were up 3.7% year over year to $1.2 billion. Despite the
lingering weakness in the U.S., total new annualized sales rose
5.0% year over year to $340 million as targeted product and field
force recruiting initiatives showed some improvement.
Financial Update
As of September 30, 2011, total investment and cash were $100.8
billion compared with $93.0 billion as of June 30, 2011, while
shareholders' equity totaled $12.7 billion against $12.0 billion at
the end of prior quarter. As of September 30, 2011, Aflac projected
its risk-based capital ratio in the range of 500–540%, compared
with more than 580% estimated at the end of 2010.
During the reported quarter, net unrealized gain on investment
securities and derivatives were $708 million as compared with $758
million at the end of prior quarter.
Annualized return on average shareholders’ equity for the
reported quarter was 24.1% against 9.7% 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 26.8%, down from 26.3% in the
previous quarter.
Guidance
Concurrent with the third 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 75–80 to a
dollar for full-year 2011, Aflac anticipates reported earnings in
the range $6.30–6.37 per share.
Additionally, using the same rate assumption, operating earnings
in the fourth quarter are expected to be within the range of
$1.45–1.52 per share.
Furthermore, 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.
Besides, management also maintained its earnings guidance for
2012 in the range of 2–5% over 2011.
Dividend Update
Concurrently, the board of Aflac also announced a 10% hike in
its quarterly cash dividend to 33 cents from 30 cents per share,
which is to be paid on December 1, 2011 to its common stockholders
of record as on November 16, 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 5.1 million shares in
the first nine months 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 25.3 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, other than raising dividends. However, sluggish
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 run, 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 November 1, 2011.
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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