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On Apr 15, we reiterated our Neutral recommendation on Aflac Inc. (AFL - Analyst Report) on the heels of solid capitalization and leading market position in Japan. However, the positives are partially offset by higher expenses as well as consistent weakness in yen and in the US markets.

Why the Retention?

Estimates for this life and health insurer witnessed modest declines since the company reported its fourth-quarter 2012 results on Feb 5. Aflac’s fourth-quarter earnings per share of $1.48 per share came in line with the Zacks Consensus Estimate although total revenue of $6.38 billion fell short of the Zacks Consensus Estimate. Yet, both top- and bottom-line surpassed the year-ago figures.

Growth was driven by improved top line in both Japan and the US, although a weak yen restricted the expected acceleration. A weak yen/dollar exchange rate had a negative impact of 4 cents per share on the operating earnings.

Meanwhile, higher operating expense as well as benefits and claims deteriorated the benefit ratio. Nevertheless, Aflac enjoys strong capitalization and remains adequately liquid as most of the de-risking activity,to get rid of its problem investments in Europe,has been dealt with. Excluding currency fluctuations, Aflac anticipates the earnings to grow by 4–7% in 2013.

A weak yen, consistent low interest-rate environment, intense exposure to small business segment generating petty growth in the US, and the overall economic volatility are the lingering concerns for Aflac. However, we believe that a minimized risk exposure, healthy capital ratios, modest improvement in fair value of investments along with a modest earnings guidance and capital deployment should infuse confidence among investors. These factors provide stability and score well with the ratings agencies, thereby strengthening scope for long-term growth as well.

Following the release of the fourth-quarter results, the Zacks Consensus Estimate for 2013 inched down 3.4% to $6.30 per share in the last 60 days. Additionally, the Zacks Consensus Estimate for 2014 edged down 1.9% to $6.77 per share in the last 60 days. With the Zacks Consensus Estimates for both 2013 and 2014 witnessing a downward trend in the near term, Aflac now has a Zacks Rank #4 (Sell).

Other Stocks That Warrant a Look

While we see slight downward pressure on Aflac in the near term, other insurers that are outperforming include Amerisafe Inc. (AMSF - Analyst Report), CNO Financial Group Inc. (CNO - Analyst Report) and Everest Re Ltd. (RE - Analyst Report). All of these carry a Zacks Rank #1 (Strong Buy).

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