Aflac Up Annually, Falters on Ests - Analyst Blog

Aflac Inc.'s (AFL) fourth quarter operating earnings per share of $1.33 came in a couple lower than the Zacks Consensus Estimate of $1.35 although results were higher than $1.18 reported in the year-ago quarter.

Earnings in the reported quarter excluded after-tax realized net investment losses of $191 million or 41 cents per share, as compared to $307 million or 65 cents per share in the prior-year quarter. It also excluded realized investment gains from securities transactions of $27 million or 5 cents per share, and other security transactions and impairments of $263 million or 56 cents per share, in the reported quarter.

Aflac also recorded a gain of $45 million or 10 cents per share on the adoption of Accounting Standards Codification (ASC) 810, effective January 1, 2010.

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 6 cents.

Including one-time items, Aflac's GAAP net income for the reported quarter came in at $437 million or 92 cents per share as compared to $251 million or 53 cents in the year-ago period. Total acquisition and operating expenses increased 5.1% year over year to $1.36 billion, while benefits and claims climbed 10.4% year over year to about $3.26 billion.

Total revenue for the reported quarter increased 15.2% year over year to $5.3 billion, although this came in lower than the Zacks Consensus Estimate of $5.6 billion. Total revenue benefited from strengthening of yen by 8.6% against the dollar. While Aflac Japan contributed 81% to the total revenue, Aflac U.S. contributed the remaining 19%.

Reflecting the stronger average yen, premium income from the Japanese operations in terms of dollars was up 13.3% year over year to $3.6 billion in the reported quarter. Premiums from the U.S. operations were up 1.0% year over year to $1.1 billion. However, total new annualized premium continued to pose a sluggish trend in the U.S., declining 2.3% year over year to $409 million.

Net investment income from the Japanese operations during the reported quarter increased 8.6% year over year to $643 million primarily due to a stronger yen/dollar exchange rate, which was 82.58, or 8.6% stronger than the average rate of 89.70 in the year-ago quarter. Net investment income from the U.S. operation was up 16.1% year over year to $144 million.

Highlights of 2010

For full year 2010, Aflac reported operating earnings of $ $2.6 billion or $5.53 per share as compared with $2.3 billion or $4.85 per share in 2009. However, this was lower than the Zacks Consensus Estimate of $5.56 per share.

Total revenue for the reported quarter increased 13.6% year over year to $20.7 billion from $18.3 billion in 2009, although this compared unfavourably with the Zacks Consensus Estimate of $21.11 billion. Total acquisition and operating expenses increased 7.0% year over year to $5.04 billion, while benefits and claims grew 7.1% year over year to about $12.11 billion.

Total investment and cash as of December 31, 2010 were $88.2 billion as compared to $85.6 billion as of September 30, 2010. The increase in total investment and cash primarily resulted from the improvement in the fair values of Aflac's investments and the strengthening of yen since the first quarter of 2010. As of December 31, 2010, Aflac projected its risk-based capital ratio to exceed 580%, compared with 479% at the end of 2009, reflecting effective capital management.

Annualized return on average shareholders' equity for the reported quarter was 15.7% as compared with 26.1% 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 23.3%, down from 26.8% in the previous quarter.

At the end of 2010, Aflac sold its holdings in Allied Irish Banks at the impaired price of $263 million.

Outlook for 2011

Concurrent with the third quarter's result release, Aflac provided a detailed outlook for 2011. The company expects operating earnings per share to increase by 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.

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.

Dividend Update

Concurrently, the board of Aflac announced its quarterly cash dividend of 30 cents per share to be paid on March 1, 2011 to its common stockholders of record as of February 15, 2010.

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. Accordingly, the company bought back 2 million shares during the fourth quarter of 2010. Further, Aflac projects to repurchase 6-12 million shares in 2011. The stock repurchase program had been shelved in 2008 due to the global market downturn.

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 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) will release its results after the market closes today, rival firm Catalyst Health Solutions Inc. (CHSI) is expected to discuss its financials on February 21, 2011.

 
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