Aflac Incorporated’s (AFL) fourth quarter earnings of $1.18 cents per share were ahead of the Zacks Consensus Estimate of $1.16. This compared favorably with earnings of 98 cents in the year-ago quarter. Earnings in the reported quarter excluded after-tax realized investment losses of $307 million or 65 cents per share, compared to losses of $262 million or 56 cents in the prior-year quarter.
Earnings for the reported quarter benefited from a decline in its operating tax rate following the completion of an examination by the Internal Revenue Service, which benefited operating earnings by $24 million or 5 cents per share. Also, the stronger yen/dollar exchange rate helped increase earnings per share by 3 cents.
Including one-time investment losses, net income for the reported quarter came in at $251 million or 53 cents per share, compared to $197 million or 42 cents in the year-ago period.
For full year 2009, net income came in at $1.5 billion or $3.19 per share, compared to $1.3 billion or $2.62 in the previous year. Operating earnings for the full year were $2.3 billion or $4.85 per share, compared to $1.9 billion or $3.99 in 2008.
Aflac’s fourth quarter and full-year results included the fourth quarter results of Continental American Insurance Company, which was acquired by Aflac on Oct 1, 2009.
Estimate Revisions Trend
Over the last 30 days, four of the 20 analysts covering the stock have lowered estimates for full year 2010, while four have moved in the opposite direction. Currently, the Zacks Consensus Estimate for 2010 is a gain of $5.28 per share, which would be a substantial improvement over full-year 2009 earnings of $4.85. In 2008, Aflac had earned $3.99 per share.
The same number of estimate revisions for 2010 in both directions does not indicate any clear directional pressure on the performance of the stock in the upcoming quarters. As a result, the stock retains its Zacks # 3 Rank, which translates into a short-term ‘Hold’ rating. Also, considering the current fundamentals of Aflac, we maintain a long-term “Neutral” recommendation on the stock.
With respect to earnings surprises, the stock has fluctuated marginally over the last four quarters prior to the reported quarter, with only one negative and three positive surprises. However, the average remained positive at 3%. This implies that Aflac has surpassed the Zacks Consensus Estimate by 3% over the last four quarters. The upside potential of the estimate for full-year 2010, essentially a proxy for future earnings surprise, currently stands at 0.4%.
Quarter in Detail
Total revenue for the reported quarter increased 7.9% year-over-year to $4.6 billion. Total revenue benefited from a stronger yen against the dollar.
Total investments and cash at the end of Dec 2009 were $73.2 billion, compared to $71.6 billion at Sep 30, 2009. The increase in total investments and cash primarily resulted from improvement in the fair values of Aflac’s investments since the end of the third quarter of 2009.
Reflecting the stronger average yen, premium income from the Japanese operations in dollars was up 10.7% year-over-year to $3.2 billion in the reported quarter. Premiums from the U.S. operations were up 5.2% year-over-year to $1.1 billion.
Net investment income from the Japanese operations during the reported quarter increased 8.5% to $592 million primarily due to a stronger yen/dollar exchange rate. Net investment income from the U.S. operation was down 1.1% year-over-year to $499 million.
The return on average shareholders’ equity for the reported quarter was 12.3%. On an operating basis (excluding realizedinvestment losses and the impact of ASC 815 on net earnings, and unrealized investment gains/losses in shareholders’ equity); the return on average shareholders’ equity came in at 24.7%.
Outlook 2010
Concurrent with its fourth quarter results release, Aflac provided its outlook for 2010. The company has set targets of flat sales to a 5% increase in both its U.S. and Japanese operations. The company expects operating earnings per share to increase by 9% to 12% in 2010 to $5.29 to $5.43 per share, excluding the impact of the yen. If the yen remains stronger and averages 90–95 to a dollar for the full year, the company anticipates reported earnings in the range of $5.24– $5.56.
Aflac has historically traded at a premium valuation to other health insurers, reflecting its superior growth prospects, consistent earnings record, superior ROE and strong financial position. As we remain confident about the fundamental outlook for Aflac, especially in Japan, we expect some upward potential pressure on the performance of the stock in the near term.
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