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Aflac Q3 Earnings Nosedive Y/Y, Ups Div

Zacks Equity Research

Aflac Inc. (AFL) reported third-quarter 2013 operating earnings per share of $1.47, which came in line with the Zacks Consensus Estimate. However, results declined 16.9% from the year-ago quarter figure of $1.77.

Operating earnings also tumbled 17.2% year over year to $687 million, primarily on declining Japan sales. A weak yen/dollar exchange rate had a negative impact of 21 cents per share on operating earnings.

Operating earnings excluded the after-tax negative impact of realized investment gains from securities transactions and impairments of $41 million or 9 cents per share compared with $124 million or 26 cents per share in the year-ago quarter. The figure also excluded hedge costs on foreign investment totalling $4 million or 1 cent a share in the reported quarter. Additionally, derivative and hedging activities worth $22 million or 5 cents per share impacted the operating earnings, as opposed to a positive effect of $64 million or 13 cents per share recorded in the year-ago period.

Including one-time items, Aflac’s GAAP net income in the reported quarter plunged about 31% to $702 million or $1.50 per share against $1.02 billion or $2.16 per share in the year-ago period. Conversely, total acquisition and operating expenses decreased 7.2% year over year to $1.33 billion, whereas benefits and claims fell 11.4% to $3.49 billion.

Further, total revenue dropped 14% year over year to $5.89 billion, although it was in line with the Zacks Consensus Estimate. A weak yen and the low-rate environment adversely affected the top line. While Aflac Japan contributed about 75% to the total revenue, Aflac U.S. contributed the remaining 25%.

Total revenue in Japan decreased 14.4% year over year to $4.4 billion, primarily owing to decelerated sales from WAYS products along with a weak average yen, which led to 64.9% decline in bank channel sales. The downfall was partially offset by 12% increase in sales of cancer and other medical products. Premium income from the Japanese operations, in terms of dollars, slid 15.2% year over year to $3.7 billion in the reported quarter.

Net investment income from the Japanese operations declined 7.7% from the prior-year quarter to $659 million. The growth was primarily mitigated by a weak yen/dollar exchange rate, which was 98.93, or 20.5% weaker than the average rate of 78.64 in the year-ago quarter.

Consequently, pre-tax operating earnings stood at $846 million in Japan, down 14.9% over the prior-year quarter. Operating margins dipped to19.2% from 19.3% in the year-ago quarter based on flat expense ratio but high benefit ratio.

On the other hand, Aflac U.S. generated revenues of $1.5 billion, up 2.9% over the prior-year quarter. Net investment income grew 4.2% year over year to $159 million. Premiums from the U.S. operations were up 3.1% year over year to $1.3 billion. Given the sluggishness in the U.S. market and limited growth in new sales, total new annualized sales inched down 1.5% year over year to $330 million as more than 90% of the accounts come from the small business market.

Subsequently, pre-tax operating earnings in the U.S. increased 3.3% year over year to $269 million, whereas persistency improved slightly to 76.7% from 76.6% in the year-ago quarter. Operating margin also edged up to 18.5% from 18.4% in the year-ago period.

Financial Update

As of Sep 30, 2013, total investment and cash were $106.7 billion compared with $118.2 billion at 2012-end, while shareholder equity totaled $14.7 billion as against $16.0 billion during the comparable period, primarily due to changes in investment valuation. Shareholder equity per share was $31.47 at the end of Sep 2013, down from $34.16 per share reported at the end of 2012.

At the end of Sep 2013, Aflac projected its risk-based capital ratio to be over 750%, higher than 630% at 2012-end, while its solvency ratio in Japan is expected to be about 730%, up from 669% at 2012-end. During the reported quarter, net unrealized gain on investment securities and derivatives were $135 million as compared with a loss of $209 million in the prior quarter.

Meanwhile, annualized return on average shareholder equity for the reported quarter was 19.8% against 24.3% 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 19.4%, down from 22.1% in the previous quarter.

Aflac bought back about 308,000 shares worth $18.5 million during the reported quarter. About 16.9 million shares were available for repurchase as of Sep 30, 2013.


Concurrent with the release of the third-quarter results, Aflac updated its 2013 outlook. Excluding currency fluctuations, Aflac anticipates operating earnings to grow 4–7% or about $6.86–7.06 per share in 2013. Accordingly, if the yen averages 95–100 against the dollar, the earnings growth is expected within $6.16–6.21 per share or about 5% for 2013.

Under the same currency assumptions, operating earnings are projected to be within $1.38–1.43 per share in the fourth quarter of 2013, while the same for full-year 2014 is estimated to be within $6.28–6.52 per share, reflecting growth of 2–5% over 2013. However, management expects to rebound in 2015. The solvency ratio in Japan is expected within 500–600%.

Aflac Japan’s third sector cancer and medical products sales are expected to exhibit growth at the higher end of nil to 5%. The latest alliance with Japan Post should drive growth in the second half of 2013, particularly, in the fourth quarter. New annualized sales in the U.S. are projected to grow by nil to 5% in 2013, reflecting difficult comps.

Further, Aflac expanded its share repurchases to $800 million in 2013, up from the prior estimate of $600 million. The company bought back shares worth $298 million in the first three quarters of 2013. Meanwhile, shares between $800 million and $1.0 billion are expected to be bought back in 2014, up from the earlier projection of $600–900 million.

Dividend Update

Concurrently, the board of Aflac hiked its regular cash dividend of 35 cents per share by 5.7% to 37 cents. This will be payable on Dec 2, 2013 to the company’s shareholders of record as on Nov 20, 2013.

Earlier, on Sep 3, 2013, Aflac paid a dividend of 35 cents per share to its shareholders of record as on Aug 21, 2013.


Aflac currently carries a Zacks Rank #3 (Hold). Other strong performers in the insurance sector include Employers Holdings Inc. (EIG), Markel Corp. (MKL) and Montpelier Re (MRH), each carrying a Zacks Rank #1 (Strong Buy).

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