Aflac Values $750M Notes

Zacks

Yesterday, Aflac Inc. (NYSE:AFL - News) announced the pricing of long-term fixed rate notes worth $750 million in two tranches. One set of 5-year senior notes are priced at par value of $400 million with a coupon rate of 2.65%. These notes are issued at a price of $99.911 that should generate yield of 2.669%.

The other tranche of 10-year fixed rate senior notes are priced at par value of $350 million with a coupon rate of 4.00%. These notes are issued at a price of $99.820 and are expected to yield 4.022%.

Management plans to use the proceeds from the sale of these notes to repay Aflac’s 1.87% Samurai notes worth $347 million (26.6 billion yen) that is due in June 2012. The remaining amount of the proceeds is expected to inject ample liquidity by utilizing funds for general corporate and capital purposes.

Earnings Review

Aflac reported fourth quarter operating earnings per share of $1.48, which came in 3 cents below the Zacks Consensus Estimate of $1.51 but were comfortably higher than $1.33 reported in the year-ago quarter.

Operating earnings escalated 10.0% year over year to $691 million. A stronger yen/dollar exchange rate helped increase operating earnings by 6 cents per share. However, total revenue for the reported quarter rose 12.9% year over year to $5.98 billion, although it was lower than the Zacks Consensus Estimate of $6.2 billion.

Despite the ongoing derisking activities, total revenue benefited from the strengthening of yen against the dollar along with consistent improvement in the U.S. and better-than-expected performance in Japan. Total acquisition and operating expenses spurted 5.9% year over year to $1.45 billion, while benefits and claims climbed 13.4% year over year to about $3.70 billion.

Given the caution related to problem investments in Europe and others, the Zacks Consensus Estimate for the first quarter of 2012 is currently pegged at $1.67 per share, about 2% higher than the year-ago quarter. In the last 7 days post earnings, 3 of the 17 firms revised their estimates upwards, while a couple of downward revisions were witnessed.

Overall, Aflac’s strong brand name and solid business model enabled it to improve earnings considerably faster than other life and health insurers such as Unum Group (NYSE:UNM - News) and Catalyst Health Solutions Inc. (NasdaqGS:CHSI - News).

Moreover, 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. Hence, we continue to retain our long-term Neutral stance on the stock, with a Zacks Rank #3, implying a short-term Hold rating.

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