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Aflac Inc.’s (AFL - Analyst Report) first-quarter 2013 operating earnings per share of $1.69 comfortably surpassed the Zacks Consensus Estimate of $1.62 but lagged the year-ago quarter earnings of $1.74 per share. Operating earnings edged down 2.9% year over year to $790 million. A weak yen/dollar exchange rate had a negative impact of 15 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 $42 million or 8 cents per share compared with a loss of $81 million or 17 cents per share in the year-ago quarter. It also excluded other operating losses and hedge costs on investment totalling $3 million or 1 cent a share in the reported quarter. Additionally, a positive impact of derivative and hedging activities worth $63 million or 14 cents per share affected the operating earnings as opposed to $52 million or 11 cents per share recorded in the year-ago period.

Including one-time items, Aflac’s GAAP net income in the reported quarter rose 13.7% to $892 million or $1.90 per share against $785 million or $1.68 per share in the year-ago period. Total acquisition and operating expenses dipped 4.8% year over year to $1.33 billion, whereas benefits and claims slid 3.4% to $3.52 billion.

However, total revenue for the reported quarter inched down 0.5% year over year to $6.21 billion, also falling short of the Zacks Consensus Estimate of $6.27 billion. A weak yen and the low-rate environment adversely affected the top line. While Aflac Japan contributed about 77% to the total revenue, Aflac U.S. contributed the remaining 23%.

Total revenue in Japan decreased 5.9% year over year to $4.6 billion, primarily owing to decelerated sales from the third sector, bank channel and WAYS products along with a weak average yen. Premium income from the Japanese operations, in terms of dollars, was down 5.9% year over year to $3.9 billion in the reported quarter.

Net investment income from the Japanese operations declined 7.6% year over year to $674 million. The growth was primarily mitigated by a weak yen/dollar exchange rate, which was 92.59, or 14% weaker than the average rate of 79.59 in the year-ago quarter. Consequently, pre-tax operating earnings stood at $989 million in Japan, dipping 4.8% over the prior-year quarter.

Conversely, Aflac U.S. generated revenues of $1.4 billion, up 3.9% over the prior-year quarter. Net investment income grew 3.4% year over year to $157 million. Premiums from the U.S. operations were up 4% year over year to $1.3 billion. Given the lingering weakness in the U.S. and limited growth in new sales, total new annualized sales slipped 5.2% year over year to $322 million as more than 90% of the accounts come from the small business market.

Subsequently, pre-tax operating earnings in the U.S. climbed 3.6% year over year to $281 million, whereas persistency was flat at 74.7% from the year-ago quarter.

Financial Update

As of Mar 31, 2013, total investment and cash were $107.4 billion compared with $118.2 billion at 2012-end, while shareholder equity totaled $15.5 billion as against $16.0 billion during the comparable period, primarily due to changes in investment valuation. Shareholder equity per share was $34.34 at the end of Mar 2013, up from $34.16 per share reported at the end of 2012.

At the end the Mar 2013, Aflac projected its risk-based capital ratio to be higher than 630% at 2012-end, whereas its solvency ratio in Japan is expected to exceed 669% at 2012-end. During the reported quarter, net unrealized gain on investment securities and derivatives were $2.0 billion as compared with $2.6 billion in the prior quarter.

Meanwhile, annualized return on average shareholder equity for the reported quarter was 22.6% against 14.5% 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 23.4%, up from 20.6% in the previous quarter.

Aflac bought back shares worth $150 million in the reported quarter. This is in line with the company’s target of buying back shares worth $400–$600 million in 2013.

Guidance

Concurrent with the release of the first-quarter result, Aflac reiterated its 2013 outlook. New annualized sales in the U.S. are projected to grow by nil to 5% in 2013, reflecting difficult comps. Aflac Japan’s third sector cancer and medical products sales are also expected to exhibit nil to 5% growth.

Excluding currency fluctuations, Aflac anticipates earnings to grow by 4%–7% or about $6.86–$7.06 per share in 2013. Accordingly, if the yen averages 95–100 against dollar, the earnings growth is expected within $5.99–$6.37 per share for 2013.

Under the same currency assumptions, operating earnings are projected to be $1.41–$1.56 per share in the second quarter of 2013.

Dividend Update

Concurrently, the board of Aflac announced a regular cash dividend of 35 cents per share, which is payable on Jun 3, 2013 to its shareholders of record as on May 22, 2013.

Earlier, on Mar 1, 2013, Aflac paid a dividend of 35 cents per share to its shareholders of record as on Feb 15, 2013.

Others

Aflac carries a Zacks Rank #4 (Sell). Other strong performers in the insurance sector include Amerisafe Inc. (AMSF - Analyst Report), Hilltop Holdings Inc. (HTH - Analyst Report) and Selective Insurance Group Inc. (SIGI - Snapshot Report), all of which carry a Zacks Rank #1 (Strong Buy).

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