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.
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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