Aflac Beats on Q1 Earnings, Misses Revs - Analyst Blog

Aflac Inc. AFL reported first-quarter 2014 operating earnings per share of $1.69 that breezed past the Zacks Consensus Estimate of $1.59, although it stood at par with the year-ago quarter figure.

However, operating earnings dipped 2% year over year to $774 million, primarily on deteriorating Japan sales. A weak yen/dollar exchange rate had a negative impact of 10 cents per share on operating earnings.

Nonetheless, including one-time items, Aflac's GAAP net income in the reported quarter tumbled to $732 million or $1.60 per share from $892 million or $1.90 per share in the year-ago period. Conversely, total acquisition and operating expenses inched down 0.7% year over year to $1.32 billion, whereas benefits and claims declined 8.6% to $3.22 billion.

Further, total revenue dropped 9.1% year over year to $5.64 billion, also lagging the Zacks Consensus Estimate of $5.88 billion. A weak yen and the low-rate environment adversely affected the results. While Aflac Japan contributed about 74% to total revenue, Aflac U.S. contributed the remaining 26%.

Total revenue in Japan plummeted 8.1% year over year to $4.2 billion, primarily owing to decelerated sales from WAYS products along with a weak average yen, which led to a 63.7% plunge in bank channel sales. The downfall was marginally offset by 1.8% uptick in sales of cancer and other medical products. Premium income, in terms of dollars, decreased 8.8% year over year to $3.6 billion in the reported quarter.

Net investment income from the Japanese operations dipped 1.7% year over year to $663 million. The growth was primarily mitigated by a weak yen/dollar exchange rate, which was 102.70, or 9.8% weaker than the average rate of 92.59 in the year-ago quarter. Consequently, pre-tax operating earnings stood at $933 million in Japan, down 5.7% over the prior-year quarter.

On the other hand, Aflac U.S. generated revenues of $1.5 billion, up 1.2% over the prior-year quarter. Net investment income grew 2.5% to $161 million, whereas premiums edged up 1.1% to $1.3 billion. Given the sluggishness in the U.S. market and limited growth in new sales, total new annualized sales fell 4.4% to $318 million as more than 90% of the accounts come from the small business market.

However, pre-tax operating earnings in the U.S. improved 7.9% year over year to $303 million, while persistency deteriorated to 73.8% from 74.7% in the year-ago quarter. Operating margin also edged up to 20.8% from 19.5% in the year-ago period.

Financial Update

As of Mar 31, 2014, total investment and cash were $110.5 billion compared with $108.5 billion at 2013-end, while shareholder equity totaled $15.7 billion as against $14.6 billion during the comparable period, primarily due to changes in investment valuation. During the reported quarter, net unrealized gain on investment securities and derivatives was $1.9 billion as compared with a gain of $1.0 billion in the prior quarter.

At the end of Mar 2014, Aflac projected its risk-based capital ratio to be over 775%, higher than +750% at 2013-end, while its solvency ratio in Japan is expected to be more than 750%, at par with 2013-end levels.

Meanwhile, annualized return on average shareholder equity for the reported quarter was 19.3% against 18.4% 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 shareholder equity), Aflac's return on average shareholder equity came in at 22.7%, up from 18.5% in the previous quarter.

Share Repurchase Update

Aflac bought back about 6.5 million shares worth $415 million during the reported quarter.

On Nov 13, 2013, the board of Aflac had sanctioned a new share repurchase program for 40 million shares, to commence with immediate effect. Including these, about 42.7 million shares were available for repurchase as of Mar 31, 2014.

2014 Guidance

Concurrent with the release of the first-quarter results, Aflac detailed its 2014 outlook.

Excluding currency fluctuations, Aflac anticipates operating earnings to grow 2–5% or about $6.28–6.52 per share in 2014. Assuming the yen averages 100 to 105 to the dollar, operating earnings should be around $6.06–6.40 per share in 2014.

Under same currency assumptions, operating earnings in second-quarter 2014 will likely be within $1.54–1.68 per share. However, Aflac expects higher spending and benefit ratios in the rest of 2014.

Earnings per share are expected to benefit from higher share buybacks, which are projected to be worth between $800 million and $1.0 billion in 2014. Based on healthy capital ratios, management now projects repatriating about 127 billion yen to the U.S., up from prior estimate of 100 billion yen.

Furthermore, Aflac Japan's third sector cancer and medical products sales are likely to exhibit growth at 2–7%. Sales in the U.S. are projected to grow by nil to 5% in 2014. The guidance reflects the negative impact of difficult comps, low interest rate environment, higher capital expenditures and currency fluctuations.

Dividend Update

Concurrently, the board of Aflac declared its regular cash dividend of 37 cents per share, payable on Jun 2, 2014 to shareholders of record as on May 21.

Earlier, on Mar 3, 2014, Aflac paid a dividend of 37 cents per share to its shareholders of record as on Feb 14.

Others

Aflac currently carries a Zacks Rank #3 (Hold). Better-ranked insurers include Amerisafe Inc. AMSF,Primerica Inc. PRI and Protective Life Corp. PL, each carrying a Zacks Rank #2 (Buy).