Aflac Inc. (AFL) reported fourth-quarter 2013 operating earnings per share of $1.40, which beat the Zacks Consensus Estimate by a penny. However, results dipped 5.4% from the year-ago quarter figure of $1.48.
Operating earnings also tumbled 6.8% year over year to $651 million, primarily on deteriorating Japan sales. A weak yen/dollar exchange rate had a negative impact of 18 cents per share on operating earnings.
Nonetheless, including one-time items, Aflac’s GAAP net income in the reported quarter increased 16.1% to $675 million or $1.45 per share from $581 million or $1.24 per share in the year-ago period. Conversely, total acquisition and operating expenses decreased 8.6% year over year to $1.38 billion, whereas benefits and claims plunged 14.9% to $3.4 billion.
Further, total revenue dropped 9% year over year to $5.80 billion, also lagging the Zacks Consensus Estimate of $5.96 billion. A weak yen and the low-rate environment adversely affected the results. While Aflac Japan contributed about 76% to total revenue, Aflac U.S. contributed the remaining 24%.
Total revenue in Japan plunged 15.9% year over year to $4.3 billion, primarily owing to decelerated sales from WAYS products along with a weak average yen, which led to 59.5% decline in bank channel sales. The downfall was partially offset by 15.7% increase in sales of cancer and other medical products. Premium income, in terms of dollars, decreased 17.3% year over year to $3.6 billion in the reported quarter.
Net investment income from the Japanese operations declined 6.5% year over year to $665 million. The growth was primarily mitigated by a weak yen/dollar exchange rate, which was 100.54, or 19.5% weaker than the average rate of 80.93 in the year-ago quarter. Consequently, pre-tax operating earnings stood at $853 million in Japan, down 5.9% over the prior-year quarter.
On the other hand, Aflac U.S. generated revenues of $1.4 billion, up 1.4% over the prior-year quarter. Net investment income grew 2% to $159 million, whereas premiums were up 2% to $1.3 billion. Given the sluggishness in the U.S. market and limited growth in new sales, total new annualized sales plunged 10.4% year over year to $397 million as more than 90% of the accounts come from the small business market.
Subsequently, pre-tax operating earnings in the U.S. slipped 1.3% year over year to $205 million, whereas persistency deteriorated to 76.8% from 77.1% in the year-ago quarter. Operating margin also edged down to 14.2% from 14.6% in the year-ago period.
Highlights of Full-Year 2013
For full-year 2013, Aflac reported operating earnings per share of $6.18, a penny higher than the Zacks Consensus Estimate but slipped 6.4% from $6.60 recorded in 2012. Operating earnings declined 6.8% year over year to $2.89 billion. A slightly weak yen/dollar exchange rate had a negative impact of 76 cents on operating earnings in 2012.
Including one-time items, GAAP net income jumped 10.2% to $3.16 billion or $6.76 per share in 2013 versus $2.87 billion or $6.11 per share in 2012.
Total revenue for the reported quarter decreased 5.6% year over year to $23.94 billion, although it breezed past the Zacks Consensus Estimate of $23.84 billion. Total acquisition and operating expenses also reduced 7.4% year over year to $5.31 billion in 2013, while benefits and claims plummeted 9.9% to $13.81 billion.
Financial Update
As of Dec 31, 2013, total investment and cash were $108.5 billion compared with $118.2 billion at 2012-end, while shareholder equity totaled $14.6 billion as against $16.0 billion during the comparable period, primarily due to changes in investment valuation. During the reported quarter, net unrealized gain on investment securities and derivatives were $1.0 billion as compared with a gain of $135 million in the prior quarter.
At the end of Dec 2013, Aflac projected its risk-based capital ratio to be over 750%, higher than 630% at 2012-end, while its solvency ratio in Japan is expected to be more than 750%, up from 669% at 2012-end.
Meanwhile, annualized return on average shareholder equity for the reported quarter was 18.4% against 19.8% 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 18.5%, down from 19.4% in the previous quarter.
Share Repurchase Update
Aflac bought back about 7.6 million shares worth $502 million during the reported quarter, while 13.2 million shares were repurchased for $800 million in 2013.
On Nov 13, 2013, the board of Aflac sanctioned a new share repurchase program for 40 million shares, to commence with immediate effect. Including these, about 49.2 million shares were available for repurchase as of Dec 31, 2013.
Guidance
Concurrent with the release of the fourth-quarter results, Aflac detailed its 2014 outlook.
Excluding currency fluctuations, Aflac anticipates operating earnings to grow 2%–5% or about $6.28–6.52 per share in 2014. Earnings per share are expected to benefit from higher share buybacks, which are projected to be worth between $800 million and $1.0 billion in 2014.
Aflac Japan’s third sector cancer and medical products sales are likely to exhibit growth at 2%–7%. Sales in the U.S. are projected to grow by nil to 5% in 2014. The guidance reflects the negative impact of difficult comps, low interest rate environment, higher capital expenditures, currency fluctuations and an increase in Japan's consumption tax that rises from 5% to 8% effective Apr 2014.
Dividend Update
Concurrently, the board of Aflac declared its regular cash dividend of 37 cents per share, payable on Mar 3, 2014 to the shareholders of record as on Feb 14.
Earlier, on Dec 2, 2013, Aflac paid a dividend of 37 cents per share to its shareholders of record as on Nov 20. This payout recorded a hike of 5.7% from the prior 35 cents, marking the 31st consecutive year of dividend rise.
Other Stocks to Consider
Aflac currently carries a Zacks Rank #4 (Sell). Better-ranked insurers include Amerisafe Inc. (AMSF), American International Group Inc. (AIG) and Cigna Corp. (CI), each carrying a Zacks Rank #2 (Buy).
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