Aflac (AFL) Up 1.2% Since Last Earnings Report: Can It Continue?
A month has gone by since the last earnings report for Aflac (AFL). Shares have added about 1.2% in that time frame, underperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Aflac due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Aflac's Q3 Earnings Beat on Lower Benefits and Claims
Aflac reported third-quarter 2023 adjusted earnings per share of $1.84, which beat the Zacks Consensus Estimate by 27.8%. The bottom line increased from $1.44 per share a year ago.
Aflac’s revenues increased 5.2% year over year to $4.95 billion in the quarter under review. The top line beat the consensus mark by 10.9%.
The strong third-quarter results were supported by higher sales, reduced benefits and claims and improved profit levels from Japan and U.S. businesses. Also, higher net investment income added to the upside.
Q3 Performance
Adjusted net investment income rose 3.4% year over year to $915 million.
Total net benefits and claims of $1.9 billion declined 10.4% year over year in the third quarter and remained 4.6% below our model estimate. Total acquisition and operating expenses dropped 1.1% year over year to $1.3 billion but came above our estimate of $1.1 billion.
Pre-tax earnings jumped 35.8% year over year to $1.8 billion in the third quarter.
Inside AFL’s Segments
Aflac Japan
The segment’s adjusted revenues decreased 4.9% year over year to $2.7 billion in the quarter under review but beat our estimate of $2.4 billion. Total net earned premiums of $2 billion dropped 7.2% year over year due to limited pay products attaining paid-up status and the implementation of a reinsurance transaction earlier. The figure beat our estimate of $1.8 billion.
Adjusted net investment income increased 2.4% year over year to $679 million due to higher variable investment income and floating rate income and comfortably beat our estimate. Pretax adjusted earnings of the segment amounted to $869 million, which increased 6.4% year over year in the third quarter and beat our estimate.
New annualized premium sales of $108 million improved 12.4% year over year. The benefit ratio of the segment was 65.1% in the third quarter.
Aflac U.S.
The segment’s adjusted revenues increased 3.9% year over year to $1.7 billion in the quarter under review and beat our estimate of $1.6 billion. Total net earned premiums climbed 3.2% year over year to $1.4 billion and beat our estimate by 1.7% due to its growth initiatives.
Adjusted net investment income of $209 million climbed 13% year over year and beat our estimate of $201 million on the back of increased floating rate income, variable investment income and a move toward higher-yielding fixed-income investments. Pretax adjusted earnings of the segment were $478 million, up 38.6% year over year in the third quarter and beat our estimate by 34.9%, thanks to reduced benefits recognized.
Aflac U.S. sales of $359 million grew 7.5% year over year. The third-quarter benefit ratio came in at 35.9%.
Financial Position (as of Sep 30, 2023)
Aflac exited the third quarter with total cash and cash equivalents of $5.5 billion, which increased from $3.9 billion at 2022-end. Total investments and cash of $111.3 billion decreased from $117.4 billion at 2022-end. Total assets fell to $125.1 billion from $131.7 billion at 2022-end.
Adjusted debt decreased to $6.7 billion at the third quarter-end from $7.1 billion at 2022-end.
Total shareholders' equity of $22.7 million increased from $20.1 million at 2022-end.
Adjusted debt to adjusted capitalization, excluding accumulated other comprehensive income, came in at 18.8%, which improved 210 basis points (bps) from 2022-end.
While it has no debt maturities in less than a year, total debt maturities worth $1.3 billion are expected within the next five years.
Adjusted book value per share increased 10.1% year over year to $48.44.
Adjusted return on equity, excluding foreign currency impact of 16.1%, improved 260 bps year over year.
Capital Deployment
Aflac bought back 9.4 million shares worth $700 million in the third quarter. It had 86.4 million shares left for buyback as of the third-quarter end.
Management announced dividends of 42 cents per share for the fourth quarter of 2023, sequentially flat. The dividend will be paid out on Dec 1, 2023, to shareholders of record as of Nov 15. It plans to increase the dividend by 19% in the first quarter of 2023.
Outlook
Aflac estimates improved sales in its Japan business for 2023, buoyed by product launches, product updates, distribution strategies and Japan Post performance. Its new medical product, which was introduced in mid-September, is showing a good start.
Management also remains optimistic about strong sales results within its U.S. business. Improving productivity, contributions from platforms like network, dental and vision and group life, and disability are expected to continue supporting the results.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended downward during the past month.
VGM Scores
Currently, Aflac has a subpar Growth Score of D, though it is lagging a bit on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions looks promising. Notably, Aflac has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
Performance of an Industry Player
Aflac is part of the Zacks Insurance - Accident and Health industry. Over the past month, Unum (UNM), a stock from the same industry, has gained 0.7%. The company reported its results for the quarter ended September 2023 more than a month ago.
Unum reported revenues of $3.12 billion in the last reported quarter, representing a year-over-year change of +5.3%. EPS of $1.94 for the same period compares with $1.51 a year ago.
For the current quarter, Unum is expected to post earnings of $1.88 per share, indicating a change of +31.5% from the year-ago quarter. The Zacks Consensus Estimate has changed -1.2% over the last 30 days.
The overall direction and magnitude of estimate revisions translate into a Zacks Rank #3 (Hold) for Unum. Also, the stock has a VGM Score of C.
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