AFL AFLAC Inc

Aflac Inc.’s (AFL) fourth-quarter 2011 operating earnings per share of $1.48 came in triple pennies below the Zacks Consensus Estimate of $1.51 but were comfortably higher than $1.33 reported in the year-ago quarter. Operating earnings escalated 10.0% year over year to $691 million. A stronger yen/dollar exchange rate helped increase operating earnings per share by 6 cents.

Operating earnings in the reported quarter excluded after-tax negative impact of realized investment losses from securities transactions and impairments of $168 million or 36 cents per share compared with $235 million or 51 cents per share in the year-ago quarter. This was partially offset by the positive impact of derivative and hedging activities worth $23 million or 5 cents per share in the reported quarter, as opposed to $44 million or 10 cents per share recorded in the year-ago period.

Including one-time items, Aflac’s GAAP net income for the reported quarter came in at $546 million or $1.17 per share compared with $437 million or 92 cents per share in the year-ago period. Total acquisition and operating expenses spurted 5.9% year over year to $1.45 billion, while benefits and claims climbed 13.4% year over year to about $3.70 billion.

However, total revenue for the reported quarter rose 12.9% year over year to $5.98 billion, although it was lower than 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 82% to the total revenue, Aflac U.S. contributed the remaining 18%.

Total revenue in Japan increased 13.1% year over year to $4.9 billion. Reflecting the stronger average yen, premium income from the Japanese operations in terms of dollars was up 13.5% year over year to $4.1 billion in the reported quarter. Net investment income from the Japanese operations increased 10.2% year over year to $708 million primarily due to a stronger yen/dollar exchange rate, which was 77.35, or 6.8% stronger than the average rate of 82.58 in the year-ago quarter.

Besides, 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 saw an uptick of 3.4% year over year to $149 million. Premiums from the U.S. operations were up 4.1% year over year to $1.2 billion. Despite the lingering weakness in the U.S., total new annualized sales rose 9.3% year over year to $441 million as targeted product and field force recruiting initiatives showed some improvement, thereby outperforming for the fourth consecutive quarter.

Full-Year 2011 Highlights

For full year 2011, Aflac reported operating net income of $2.97 billion or $6.33 per share as compared with $2.62 billion or $5.53 per share in 2010. However, operating earnings per share lagged the Zacks Consensus Estimate of $6.36. A stronger yen/dollar exchange rate helped increase operating earnings per share by 36 cents.

Operating earnings in the reported quarter excluded after-tax negative impact of realized investment losses, which included securities transactions and impairments along with derivative and hedging activities, of $1.01 billion or $2.15 per share against $274 million or 58 cents per share in 2010. Including one-time items, Aflac’s GAAP net income for the reported quarter declined to $1.96 billion or $4.18 per share from $2.34 billion or $4.95 per share in 2010.

Total revenue increased 6.9% year over year to $22.17 billion, but lagged behind the Zacks Consensus Estimate of $23.2 billion. Aflac Japan revenues were up 14.9% to $18.4 billion, accounting for 83% of the total revenues in 2011. Besides, Aflac US’ revenue increased 3.8% over 2010 to $5.3 billion, accounting for the remaining 17% of the total revenue.

Additionally, total acquisition and operating expenses increased 7.7% year over year to $5.43 billion, while benefits and claims climbed 13.6% year over year to about $13.75 billion.

Financial Update

As of December 31, 2011, total investment and cash were $103.46 billion compared with $88.23 billion at 2010-end, while shareholders' equity totaled $13.50 billion against $11.06 billion at the end of 2010. Shareholders' equity per share was $28.96 at the end of 2011, up from $27.25 per share reported at the end of prior quarter.

At the end of 2011, Aflac projected its risk-based capital ratio in the range of 480–520%, compared with more than 580% estimated at 2010-end. During the reported quarter, net unrealized gain on investment securities and derivatives were $1.2 billion as compared with $708 million at the end of prior quarter.

Annualized return on average shareholders’ equity for the reported quarter was 16.6% against 24.1% 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 22.7%, down from 26.8% in the previous quarter.

Guidance

Concurrent with the fourth quarter’s result release, Aflac generated its outlook for 2012. The company expects Aflac U.S. revenue to grow by 3–8%, although revenue projection in Aflac Japan ranges from a negative 2% to 5% in 2012.

Besides, management also maintained its earnings guidance for 2012 in the range of 2–5% over 2011, reflecting the impact of portfolio derisking and investment of significant cash flows at low interest rates. However, the company anticipates the earnings growth to improve in 2013.

Dividend Update

Concurrently, the board of Aflac announced a regular cash dividend of 33 cents per share to be payable on March 1, 2012 to its shareholders of record as on February 15, 2012.

In October 2011, Aflac had hiked its dividend by 10% to 33 cents, which was paid on December 1, 2011 to its stockholders of record as on November 16, 2011.

Share Repurchase Update

In an effort 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 0.9 million shares during the reported quarter, repurchasing a total of 6.0 million shares in 2011. This came in at lower end of Aflac’s projection to repurchase 6–12 million shares in 2011. At the end of the 2011, Aflac had 24.4 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, 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 #3, implying a short-term Hold rating.

Meanwhile, Aflac’s peer Unum Group (UNM) is slated to release its results after the market closes on February 6, 2012, although Catalyst Health Solutions Inc. (CHSI) is yet to declare its earnings schedule for the fourth quarter.

 
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