Monday, January 31, 2011

Aflac Inc. (NYSE: AFL): Q4 Earnings Preview 2010

Aflac Inc. (NYSE: AFL), the world's largest seller of supplemental disability insurance, is scheduled to release its fourth-quarter financial results after the closing bell on Tuesday, February 1, 2011. Analysts, on average, expect the company to report earnings of $1.35 per share on revenue of $5.59 billion. In the year ago quarter, the company reported earnings of $1.18 per share on revenue of $4.60 billion.

Aflac Inc., through its subsidiary, American Family Life Assurance Company of Columbus, provides supplemental health and life insurance. Aflac gets most of its revenue from policies supplementing work and government health insurance in Japan.

In the preceding third quarter, the Columbus, Georgia-based company's net income was $690 million, or $1.46 a share, compared to a profit of $363 million, or 77 cents a share, in the year-ago quarter. Operating earnings, which exclude net realized investment gains and losses and other items, were $684 million, or $1.45 a share, compared to $589 million, or $1.25 a share, in the third quarter of 2009. Revenue grew 19.2% to $5.4 billion from $4.5 billion in the same quarter last year. Analysts, on average, expect the company to report earnings of $1.39 per share on revenue of $5.27 billion. 

At its last earnings call in October, the company said that it expects to exceed its annual objective of zero to 5% growth in new sales. The company's objective for 2010 was to increase operating earnings per diluted share by 9% to 12%, excluding the impact of the yen. Within that range, it expects operating earnings to increase approximately 10% for the full year to $5.34 per diluted share before the impact of foreign currency. If the yen averages 80 to 85 to the dollar for the fourth quarter, the company would expect full-year reported operating earnings to be approximately $5.52 to $5.57 per diluted share. Using that same exchange rate assumption, Aflac expects fourth quarter operating earnings of $1.31 to $1.36 per diluted share. Aflac's objective of increasing operating earnings by 8% to 12% in 2011 before the impact of foreign currency also remains unchanged. However, the company said that if interest rates remain at historically low levels, earnings growth in 2011 would likely be at the low end of the range. 

Aflac has continued to grow in Japan (about 75% of sales), but growth in the U.S. (roughly 25%) has been tougher to find. Low interest rates are hurting the sector by making it difficult to repay some of their older policies. The sector has also seen declining revenue as customers shift towards scaled down benefits packages to save money. This marks a huge shift in the industry as customers have previously been more disposed toward paying higher premiums for more comprehensive care.

Insurance analysts and investors often focus on operating profit because it gives a better view of insurers’ main underwriting businesses.

Life insurers' large investment portfolios mean their bottom lines generally follow broad strokes in the markets, which this quarter set up the firms for improvement. The S&P 500 index rose roughly 10% over the period, and interest rates improved some from the prior quarter, although they remain on the weak side historically. Some companies were still struggling with investment losses in the year-earlier period, setting up easy comparisons. As for underwriting results, the insurers continue to operate in a less-than-ideal market of intense competition with weak economics weighing on demand. However, analysts' expectations for improved operating profits on the whole indicate business may be improving.

Aflac has been significantly focusing on strengthening its insurance operations through successful product launches and the expansion of its distribution system, which has been significantly contributing to its strong sales results. This has also enabled the company to generate healthy capital ratios and cash position.Aflac expects to repurchase 6-12 million shares in 2011.

Full Disclosure: None.

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