Aflac Profit Rockets on Strong Yen - Analyst Blog

Aflac Inc.'s (AFL) third quarter operating earnings per share of $1.45 were modestly ahead of the Zacks Consensus Estimate of $1.39. This compared favorably with earnings of $1.25 in the year-ago quarter.

Earnings in the reported quarter excluded after-tax realized net investment gains of $6 million or one cent per share, as compared to investment losses of $226 million or 48 cents per share in the prior-year quarter. 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 7 cents.

Including one-time investment losses, Aflac's GAAP net income for the reported quarter came in at $690 million or $1.46 per share as compared to $363 million or 77 cents in the year-ago period. Total acquisition and operating expenses increased 6.6% year over year to $1.24 billion, while benefits and claims climbed 10.1% year over year to about $3.10 billion.

Total revenue for the reported quarter increased 19.2% year over year to $5.4 billion. This also compared favourably with the Zacks Consensus Estimate of $5.23 billion. Total revenue benefited from a stronger yen against the dollar. While Aflac Japan contributed 76% to the total revenue, Aflac U.S. contributed the remaining 24%, following the prior quarter contribution trend.

Reflecting the stronger average yen, premium income from the Japanese operations in terms of dollars was up 13.2% year over year to $3.5 billion in the reported quarter. Premiums from the U.S. operations were up 3.6% year over year to $1.1 billion. However, total new annualized premium continued to pose a sluggish trend in the U.S., declining 5.3% year over year to $324 million.

Net investment income from the Japanese operations during the reported quarter increased 9.9% year over year to $624 million primarily due to a stronger yen/dollar exchange rate, which was 85.74, or 9.1% stronger than the average rate of 93.56 in the year-ago quarter. Net investment income from the U.S. operation was up 11.9% year over year to $138 million.

Total investment and cash as of September 30, 2010 were $85.6 billion as compared to $79.5 billion as of June 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 September 30, 2010, Aflac's risk-based capital ratio exceeded 580%, compared with 560% at the end of June 30, 2010, due to declines in realized investment losses.

Annualized return on average shareholders' equity for the reported quarter was 26.1% as compared with 24.5% 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%, flat compared to the previous quarter.

Outlook 2010

Concurrent with the third quarter's result release, Aflac revised its outlook for 2010 and 2011. The company expects operating earnings per share to increase by 9%–12% in 2010, which would be around $5.34 per share, excluding the impact of the yen.

If the yen remains stronger and averages around 80–85 to a dollar for the fourth quarter of 2010, Aflac anticipates reported earnings in the range $5.52–$5.57 per share, up from prior estimation of $5.44 per share. New sales projection in Aflac Japan has now gone up to 5% from bare breakeven in 2010.

For fourth quarter 2010, Aflac expects operating earnings to be in the range of $1.31–$1.36 per share, applying the same exchange rate assumption.

For 2011, Aflac targets to increase its operating earnings by 8%–12% over 2010, excluding the impact of the yen, thereby reiterating guidance. 

Dividend Update

On August 10, 2010, the board of Aflac increased its quarterly cash dividend by 7.1% to 30 cents per share from 28 cents per share, marking the 28^th consecutive year of dividend increment. The hiked dividend will be paid on December 1, 2010 to its common stockholders of record as of November 17, 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. This is expected to be executed in the fourth quarter of 2010. Besides, 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 forward, the company's strong capital and surplus cash position is expected to mitigate balance sheet risks and provide liquidity cushion to its long term growth, as well as return value to shareholders from time to time.

 
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