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Aflac's Core Growth Remains Stressed, Capital Position Strong

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On Jul 2, 2014, we issued an updated research report on Aflac Inc. (AFL - Free Report) . This supplemental health and life insurer’s strong market position in Japan and active capital management are partly offset by competitive market risks in the U.S. and Japan.

This Zacks Rank #3 (Hold) stock maintained an earnings streak in all the last 4 quarters with an average beat of 4.5%. Although the company’s first-quarter 2014 earnings topped the Zacks Consensus Estimate by about 6.3%, it was unchanged from the year-ago quarter figure.

Aflac benefits from healthy capital ratios, product expertise, stable ratings and accelerated capital deployment, now that most of the investment portfolio de-risking has been completed. A disciplined expense management is also aiding sustained margins.

This is also evident from management’s projection to repatriate funds worth 127 billion yen ($1.24 billion) from Japan to the U.S. in 2014, up from the prior estimate of 100 billion yen ($0.98 billion), part of which will likely facilitate share repurchases.

Overall, a stable economy should help the company gather momentum in the long run, negate interest and currency risks, and strengthen financials. Alongside, Aflac will be able to gain from the increased client activity and enhanced group product platform, which will be eventually reflected in top- and bottom-line growth. Based on these factors, management also expects earnings growth to gradually rebound from 2015 onwards.

Near-Term Sluggishness

The weak economy in Japan, which accounts for about three-fourth of Aflac’s total revenue, is expected to continue to impede exchange rate, financials and new money yield in 2014.The yen/dollar exchange rate was weak by 18.2% year over year in 2013 and 9.8% in first-quarter 2014, implying that deterioration is expected in the upcoming quarters as well.

Alongside, Aflac U.S.continues to experience sluggish sales due to low demand, recent healthcare reforms and reduced client activity from larger businesses due to competitive pressure.

These restraints are also reflected in a weak growth guidance and management’s expectation of low-single digit growth in 2014 owing to the negative impact of difficult comps, low interest rate environment, higher capital expenditures, currency fluctuations and higher Japan's consumption tax that rose from 5% to 8% effective Apr 2014.

Overall, a stable risk-reward balance in the near term has kept the Zacks Consensus Estimate for 2014 intact at $6.24 per share in the last 60 days. The same for 2015 dipped 3 cents a share to $6.58 in the similar time length. However, on a year-over-year basis, earnings are expected to grow by 1% in 2014 and 5.5% in 2015.

Key Picks in the Sector

While Aflac carries a Zacks Rank #3 (Hold), some better-ranked life insurers include Lincoln National Corp. (LNC - Free Report) , China Life Insurance Co. Ltd. (LFC - Free Report) and Sun Life Financial Inc. (SLF - Free Report) . All these stocks have a Zacks Rank #2 (Buy).

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