Aflac Outperforms, Hikes Dividend

Oct.28.11 | About: Aflac Incorporated (AFL)

Aflac Inc.’s (NYSE: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.


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 (NYSE:UNM) and Catalyst Health Solutions Inc. (NASDAQ:CHSI) are expected to release their results after the market closes on November 1, 2011.