Aflac's Slow Growth May Endanger Leading Status in Japan
On Dec 4, we issued an updated research report on Aflac Inc. (AFL). The latest dividend hike and accelerated share buybacks are led by a secure capital position and better-than-expected profit repatriation. However, persistent weakness in the top line for the past five quarters cast a shadow for the coming quarters.
However, this Zacks Rank #3 (Hold) stock has maintained an earnings streak in all the last four quarters with an average beat of 4.3%. Moreover, the company’s third-quarter 2014 earnings per share topped the Zacks Consensus Estimate by about 5.6% as well as the year-ago quarter figure by 2.7%. Lower benefits, claims and operating expenses were mostly offset by lower sales in Japan.
Additionally, low interest rates and weak yen/dollar exchange rate (down 6.1% in the first nine months of 2014) have been pulling down Aflac’s earnings capacity. Meanwhile, the third sector sales, which contribute about 75% to Japan’s top line, have decelerated significantly since 2013.
Declining sales of WAYS products also led to sizeable declines in the bank channel sales in the past several quarters, indicating tough quarters ahead. Subsequently, third sector sales in Japan fell 2.8% year over year in the first nine months of 2014. This has also tightened third sector sales outlook at the lower-end of 2–7% in 2014, down from the previous estimate in the higher-end of the range.
Moreover, both S&P Ratings and Fitch’s negative outlook on Japan’s sovereign rating raise economic concern, also evident from the maintenance of a negative outlook on Aflac’s debt. High proportion of Japan Government Bonds (JGBs) amid a historically low interest-rate environment has also adversely affected the new money yield in Japan during the first nine months of 2014.
Furthermore, despite 46% of its investments being dollar-denominated, the total portfolio yield declined in the U.S. Total annualized new sales in the U.S. continues to fluctuate and declined 4.5% year over year in the first nine months of 2014. Subsequently, management projects new annualized sales in the U.S. to witness a reduction of 2–4% in 2014.
Even operating cash flow plunged 30% in 2013 and 36.1% at Sep 2014-end. Low earnings visibility due to the aforementioned factors have further led to tightening of earnings growth guidance to low-single digit in 2014 and about mid-single digit in 2015.
Upward Risks
Conversely, Aflac’s proactive organic growth initiatives are likely to boost financials, once the macro headwinds dissipate. Management anticipates improvements based on growth from the third sector, particularly, from medical and cancer products, and the strategic alliance with Japan Post. Aflac has expanded its network base from about 3,000 postal outlets at Sep 2014-end to 10,000 post offices in Oct 2014, and eventually targets 20,000 locations by first-quarter 2016.
Moreover, as a result of the reinsurance agreements in Sep 2013 and Oct 2014, a shift toward newer products, lower loss ratios, favorable claim trendsand disciplined expenses and accounts management, we expect the benefit ratio to continue improving in the upcoming years as in 2013 and in the first nine months of 2014.
Overall, a cautious risk-reward profile in the near term has led the Zacks Consensus Estimate for 2014 and 2015 to dip 0.5% and 3.3% to $6.17 and $6.21 per share, respectively, in the last 60 days. Moreover, the Most Accurate estimate for Aflac’s 2014 and 2015 earnings currently stand at $6.15 and $6.07 a share, translating into Earnings ESP of -0.3% and -2.3%, respectively. This indicates possibility of earnings miss for both this year and the next.
Key Picks in the Sector
Better-ranked life and accidental health insurers include China Life Insurance Co. Ltd. (LFC) and Employers Holdings Inc. (EIG), both of which sport a Zacks Rank #1 (Strong Buy). Another peer, Amerisafe Inc. (AMSF), with a Zacks Rank #2 (Buy) is also worth a look.
Read the Full Research Report on AFL
Read the Full Research Report on LFC
Read the Full Research Report on AMSF
Read the Full Research Report on EIG
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