Aflac Inc.’s (AFL) second quarter operating earnings per share of $1.35 were a couple of pennies ahead of the Zacks Consensus Estimate of $1.33. This compared favorably with earnings of $1.20 in the year-ago quarter.
Earnings in the reported quarter excluded after-tax realized investment losses of $66 million or 14 cents per share that were partially offset by a gain of $8 million or 2 cents per share. In the prior-year quarter investment losses stood at $249 million or 53 cents per share. Earnings for the reported quarter benefited from top-line growth and a stronger yen/dollar exchange rate that helped increase operating earnings per share by 2 cents.
Including one-time investment losses, Aflac’s GAAP net income for the reported quarter came in at $581 million or $1.23 per share as compared to $314 million or 67 cents in the year-ago period. Total acquisition and operating expenses increased 8.0% year over year to $1.21 billion, while benefits and claims were up 5.9% year over year to about $2.89 billion.
Total revenues for the reported quarter increased 15.5% year over year to $5 billion. Total revenue benefited from a stronger yen against the dollar. While Aflac Japan contributed 76% to the total revenue, Aflac U.S. contributed the remaining 24%. Reflecting the stronger average yen, premium income from the Japanese operations in terms of dollars was up 9.8% year over year to $3.2 billion in the reported quarter. Premiums from the U.S. operations were up 4.9% year over year to $1.1 billion.
Net investment income from the Japanese operations during the reported quarter increased 9% year over year to $593 million primarily due to a stronger yen/dollar exchange rate. Net investment income from the U.S. operation was up 6.1% year over year to $135 million.
Total investments and cash as of June 30, 2010 were $79.5 billion as compared to $74 billion as on March 31, 2010. The increase in total investments and cash primarily resulted from the improvement in the fair values of Aflac’s investments and strengthening of yen since the first quarter of 2010. As of June 30, 2010, the company’s risk-based capital ratio exceeded 560%, compared with 539% at the end of March 31, 2010, due to declines in realized investment losses.
The annualized return on average shareholders’ equity for the reported quarter was 24.5% as compared with 29.2% 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 shareholders’ equity) Aflac’s return on average shareholders’ equity came in at 26.8% against 28.9% in the previous quarter.
Outlook 2010
Concurrent with second quarter’s result release, Aflac revised its outlook for 2010 and 2011. The company expects operating earnings per share to increase by 9%-12% in 2010, which would be around $5.34 per share, excluding the impact of the yen. The company anticipates reported earnings to be about $5.44 per share provided the yen remains stronger and averages around 90 to a dollar for the second half of 2010.
For the third quarter of 2010, Aflac expects operating earnings to be in the range of $1.35-$1.38 per share, applying the same exchange rate assumption.
For 2011, the company targets to increase its operating earnings by 8%-12% over 2010, excluding the impact of the yen.
Dividend Update
The board of Aflac declared the third quarter cash dividend of 28 cents per share to its common stock shareholders. This will be paid on Sept 1, 2010 to shareholders of record as on Aug 18, 2010.
Our Take
Over the years, this company has been significantly focusing on strengthening its insurance operations through successful product launches and expansion of its distribution system that has been significantly contributing to its strong sales results. This has also enabled the company to generate healthy capital ratios and cash position. However, lower-than-expected growth in the U.S. operations due to realized investment losses; credit rating downgrades and interest-rate and currency risks continue to be an overhang on the desired advancement.
Although near term outlook remains cautious, we believe a stable economy in the long term will gather momentum and negate interest and currency risk, thereby providing more profitable investment opportunities to Aflac.
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