As expected, Aflac Inc. (AFL - Analyst Report) was able to keep a strong momentum once againwith the second quarter earnings, marking three straight quarters of average earnings beat of 3.8%. The second-quarter 2014 operating earnings per share of $1.66 comfortably surpassed the Zacks Consensus Estimate of $1.59 and the year-ago quarter figure of $1.62, primarily on lower share count.
However, operating earnings dipped 0.1% year over year to $757 million, due to decline in sales from Japan. A weak yen/dollar exchange rate had a negative impact of 3 cents per share on operating earnings.
Including one-time items, Aflac’s GAAP net income in the reported quarter tumbled to $810 million or $1.78 per share from $889 million or $1.90 per share in the year-ago period. Conversely, total acquisition and operating expenses rose 2.3% year over year to $1.31 billion, while benefits and claims fell 3.4% to $3.29 billion.
Total revenue fell 3.4% year over year to $5.84 billion, although it came at par with the Zacks Consensus Estimate. A weak yen and the low interest rate environment adversely affected results. While Aflac Japan contributed about 74% to total revenue, Aflac U.S. contributed the remaining 26%.
Total revenue in Japan dropped 2.7% year over year to $4.3 billion, primarily owing to decelerated sales from WAYS products along with a weak average yen, which led to a 19.9% plunge in bank channel sales. The downfall was marginally offset by a 4.5% uptick in sales of cancer and other medical products. Premium income, in terms of dollars, decreased 3.8% year over year to $3.6 billion in the reported quarter.
However, net investment income from the Japanese operations improved 4% year over year to $680 million. The growth was primarily mitigated by a weak yen/dollar exchange rate, which was 102.15, or 3.3% weaker than the average rate of 98.76 in the year-ago quarter. Consequently, pre-tax operating earnings stood at $927 million in Japan, down 1.3% from the prior-year quarter.
On the other hand, Aflac U.S. generated revenues of $1.5 billion, up 1.3% from the prior-year quarter. Net investment income grew 2.5% to $161 million, whereas premiums edged up 1.2% to $1.3 billion. Given the sluggishness in the U.S. market and limited growth in new sales, total new annualized sales fell 8.2% to $334 million as more than 90% of the accounts come from the small business market.
However, pre-tax operating earnings in the U.S. increased 5.7% year over year to $300 million, while persistency improved slightly to 76.4% from 76.3% in the year-ago quarter. Operating margin also edged up to 20.3% from 19.5% in the year-ago period, reflecting improved benefit ratio.
As of Jun 30, 2014, total investment and cash were $114.7 billion compared with $108.5 billion at 2013-end, while shareholder equity totaled $17.6 billion against $14.6 billion in the comparable period, primarily due to changes in investment valuation. During the reported quarter, net unrealized gain on investment securities and derivatives was $2.9 billion compared with $1.9 billion in the prior quarter.
At the end of Jun 2014, Aflac projected its risk-based capital ratio to be over 800%, higher than +750% at 2013-end, while its solvency ratio in Japan is expected to be more than 800%, higher than 750% at 2013-end.
Meanwhile, annualized return on average shareholder equity for the reported quarter was 19.5% against 19.3% 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 21.3%, down from 22.7% in the previous quarter.
Share Repurchase Update
Aflac bought back about 1.6 million shares worth $100 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 41.1 million shares were available for repurchase as of Jun 30, 2014.
Concurrent with the release of second-quarter results, Aflac detailed its 2014 outlook. Excluding currency fluctuations, Aflac anticipates operating earnings to grow 3–4% in 2014, from the prior estimate of 2–5%. Assuming the yen averages 100 to 105 to the dollar, operating earnings should be around $6.16–6.30 per share in 2014 against $6.06–6.40 per share projected earlier.
Under same currency assumptions, operating earnings in third-quarter 2014 will likely be within $1.38–1.47 per share. However, Aflac expects higher spending and benefit ratios in the rest of 2014.
Beginning fourth-quarter 2014, Aflac anticipates to incur quarterly costs of about 2 cents per share due to the sales initiatives taken up in the U.S.
Earnings per share is expected to benefit from higher share buybacks, which are projected to be about $1.0 billion in 2014. Based on healthy capital ratios, management previously projected repatriation of about 127 billion yen to the U.S., up from the 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 now projected to fall by 4–8% in 2014, down from the prior growth range of 0–5%. The guidance reflects the negative impact of difficult comps from sales of revised medical product introduced in Japan in Aug 2014, low interest rate environment, higher capital expenditures and currency fluctuations.
Concurrently, the board of Aflac declared its regular cash dividend of 37 cents per share, payable on Sep 2, 2014 to shareholders of record as on Aug 20.
Earlier, on Jun 2, 2014, Aflac paid a dividend of 37 cents per share to shareholders of record as on May 21.
Along with Aflac, Lincoln National Corp. (LNC - Analyst Report), Symetra Financial Corp. and Blue Capital Reinsurance Holdings Ltd. (BCRH - Snapshot Report) carry a Zacks Rank #2 (Buy) and are worth considering.