Aflac Inc.’s (AFL) operating earnings in the third quarter stood at $1.25 per share, which was a nickel ahead of the Zacks Consensus Estimate of $1.20. This also compares favorably with earnings of $1.02 in the year-ago quarter. The upside was primarily based on better-than-expected sales in its Japan operations resulting from continued strengthening of the yen against the dollar.
GAAP net income for the quarter came in at $363 million, or 77 cents per share, compared to $100 million, or 21 cents in the year-ago quarter.
Net income for the third quarter included after-tax realized investment losses of $226 million, or 48 cents per share, compared to realized investment losses of $389 million, or 81 cents in the prior-year quarter. The company also realized investment losses of $22 million from the impairment of a collateralized debt obligation and $5 million primarily from the impairment of collateralized mortgage obligations. In addition, the company realized $13 million of investment gains from sales and redemptions of investment securities.
Total revenues increased 22.6% year over year to $4.5 billion. Revenue growth benefited from the strengthening of the yen against the dollar.
Total investments and cash at quarter end were $71.6 billion, compared to $65.6 billion at June 30, 2009. The increase reflects a stronger yen at the end of the period and improvement in the fair values of the company’s investments, compared with invested asset values at the end of the prior quarter. Revenue increased 2.8% year over year and 2.2% year over year from the Japan operations and the U.S. operations, respectively.
Sales environment in the U.S. remained challenging. Total new premium sales for the U.S. operations were down 7.2% year over year to $342 million during the reported quarter. Like the second quarter however, growth of new payroll accounts remained solid. Newly established payroll accounts rose 15% in the third quarter. In addition, new agent recruitment also remained strong. Newly recruited agents increased 9.4% during the quarter to more than 7,000.
The annualized return on average shareholders’ equity in the quarter was 20.4% compared to 21.7% in the prior-year quarter. On an operating basis, the return on average shareholders’ equity came in at 27%, in line with the prior quarter. Concurrent with the third quarter earnings release, the Board of Directors declared a fourth quarter cash dividend of 28 cents per share, which is payable on Dec 1, 2009, to shareholders of record on Nov 18, 2009.
Outlook
Aflac expects that U.S. new annualized premium sales will fall short of its annual objective of flat to 5% growth in 2009. However, with the recruitment of new agents, effective training programs and new payroll account growth, the company expects a better sales year in 2010.
The company continues to expect 2009 operating earnings growth (excluding the impact of foreign currency) to remain in the range of the 13%-15% as provided earlier.
If the yen averages 90-95 to the dollar in the last three months of the year, the company expects reporting operating earnings in the range of $1.08 to $1.16 per share in the fourth quarter of 2009. Under that scenario, the full year earnings are expected to be in the range of $4.75-$4.83 per share.
For 2010, the company expects operating earnings growth (excluding the impact of foreign currency) in the range of the 9%-12%. We anticipate modest improvement in Aflac’s Japan sales, as sales through the new channels (banks and the Japan Post network) gather momentum in the coming quarters but the economic slowdown will hurt the sales, both in U.S. as well as in Japan. As such, we maintain a Neutral recommendation on the shares.
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