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Aflac Inc. (AFL - Analyst Report) reported second-quarter 2013 operating earnings per share of $1.62. The results comfortably surpassed the Zacks Consensus Estimate of $1.52 but were a penny higher than year-ago quarter figure. Operating earnings edged up 0.5% year over year to $759 million. A weak yen/dollar exchange rate had a negative impact of 22 cents per share on operating earnings.
Operating earnings in the reported quarter excluded the after-tax negative impact of realized investment gains from securities transactions and impairments of $55 million or 12 cents per share compared to a loss of $228 million or 49 cents per share in the year-ago quarter. It also excluded other operating losses and hedge costs on investment totalling $4 million or 1 cent a share in the reported quarter. Additionally, a positive impact of derivative and hedging activities worth $79 million or 17 cents per share affected the operating earnings as opposed to a negative impact of $44 million or 9 cents per share recorded in the year-ago period.
Including one-time items, Aflac’s GAAP net income in the reported quarter surged about 84% to $889 million or $1.90 per share against $483 million or $1.03 per share in the year-ago period. Total acquisition and operating expenses decreased 8.7% year over year to $1.28 billion, whereas benefits and claims declined 9.4% to $3.41 billion.
However, total revenue for the reported quarter climbed 2.4% year over year to $6.04 billion, also exceeding the Zacks Consensus Estimate of $5.86 billion. 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 10.7% year over year to $4.4 billion, primarily owing to decelerated sales from the cancer, medical, bank channel and WAYS products along with a weak average yen. Premium income from the Japanese operations, in terms of dollars, slid 11.8% year over year to $3.7 billion in the reported quarter.
Net investment income from the Japanese operations declined 5.4% year over year to $653 million. The growth was primarily mitigated by a weak yen/dollar exchange rate, which was 98.76, or 18.8% weaker than the average rate of 80.19 in the year-ago quarter.
Consequently, pre-tax operating earnings stood at $940 million in Japan, dipping 2.5% over the prior-year quarter. However, operating margins improved to21.5% from 19.6% in the year-ago quarter based on lower expenses.
Conversely, Aflac U.S. generated revenues of $1.3 billion, up 3.5% over the prior-year quarter. Net investment income grew 3.1% year over year to $158 million. Premiums from the U.S. operations were up 3.5% 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 up 1.4% year over year to $364 million as more than 90% of the accounts come from the small business market.
Subsequently, pre-tax operating earnings in the U.S. increased 9.9% year over year to $283 million, whereas persistency deteriorated slightly to 76.3% from 76.6% from the year-ago quarter.
As of Jun 30, 2013, total investment and cash were $103.9 billion compared with $118.2 billion at 2012-end, while shareholder equity totaled $13.7 billion as against $16.0 billion during the comparable period, primarily due to changes in investment valuation. Shareholder equity per share was $29.46 at the end of Jun 2013, up from $34.16 per share reported at the end of 2012.
At the end the Jun 2013, Aflac projected its risk-based capital ratio to be over 700%, higher than 630% at 2012-end, while its solvency ratio in Japan is expected to be about 585%, lower than 669% at 2012-end. During the reported quarter, net unrealized loss on investment securities and derivatives were $209 million as compared with a gain of $2.0 billion in the prior quarter.
Meanwhile, annualized return on average shareholder equity for the reported quarter was 24.3% against 22.6% 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 22.1%, down from 23.4% in the previous quarter.
Aflac bought back about 2.3 million shares that were worth $129 million in the reported quarter. About 17.2 million shares were available for repurchases as of Jun 30, 2013.
Concurrent with the release of the second-quarter result, Aflac updated its 2013 outlook. Aflac Japan’s third sector cancer and medical products sales are expected to exhibit nil to 5% growth. However, 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.
Excluding currency fluctuations, Aflac anticipates reported earnings to grow 4–7% or about $6.86–7.06 per share in 2013. Accordingly, if the yen averages 95–105 against dollar, the earnings growth is expected within $5.83–6.37 per share or about 5% for 2013.
Under the same currency assumptions along with a tax benefit of 10 cents per share, operating earnings are projected to be $1.41–1.51 per share in the third quarter of 2013. The solvency ratio in Japan is expected within 500–600%. Further, Aflac intends to repurchase shares worth $600 million in 2013, while another $600–900 million of buybacks is projected for 2014.
Concurrently, the board of Aflac announced a regular cash dividend of 35 cents per share, which is payable on Sep 3, 2013 to its shareholders of record as on Aug 21, 2013.
Earlier, on Jun 3, 2013, Aflac paid a dividend of 35 cents per share to its shareholders of record as on May 22, 2013.
Aflac carries a Zacks Rank #3 (Hold). Other strong performers in the insurance sector include Amerisafe Inc. (AMSF - Analyst Report), Ace Limited (ACE - Analyst Report) and Everest Re Ltd. (RE - Analyst Report), all of which carry a Zacks Rank #2 (Buy).