Is AFL A Buy?

An excellent dividend track record, solid balance sheet, nice operating model, good historical results, and bright forecasts for future growth makes the supplemental insurance giant worthy of your attention.

Aflac Inc. [NYSE: AFL] (American Family Life Assurance Company) is an American general business holding company. The company, through its subsidiaries, is involved in providing supplemental health and life insurance products to more than 50 million people in the United States and Japan.

Aflac is the leading provider of supplemental insurance at the worksite in the United States, selling voluntary supplemental insurance products for people who already have major medical or primary insurance coverage.

It is the largest foreign insurance company in Japan, insuring one in four households in Japan.

Aflac’s products include short-term disability, life insurance, critical illness, hospital indemnity, cancer expense, dental, accident, vision sickness and hospital intensive care, to mention a few. 

The company pays cash benefits directly to the policyholders when they have covered accident or illness. The company was founded in 1955 and is headquartered in Columbus, Georgia.

Aflac 101

Aflac is a 60+ year-old insurance giant with major operations in the US and Japan. The company’s stock is not known for extreme volatility though the pandemic obviously was an exception. However, the company’s performance during the contagion has been pretty decent.

Aflac’s employees have been allowed to work from home, the company has increased benefits, not only for employees, but policyholders as well, and has granted zero-interest loans to agents and agencies in the US and Japan.

The company has been promoting virtual and digital sales, and it has seen an upswing in demand for its products.

Aflac Operations Are Impressive

On the operating side of things, things have been going well enough. For the third quarter, adjusted earnings per share increased 19.8% to $1.39. Total revenues were $5.7 billion in the third quarter of 2020, compared to $5.5 billion in the third quarter of 2019.

Net earnings were $2.5 billion, or $3.44 per diluted share, compared to $777 million, or $1.04 per diluted share, a year ago.

The increase in net earnings in the third quarter of 2020 reflects a $1.4 billion benefit, primarily due to deferred tax benefits, which were allowed due to newly-released US tax regulations.

On a segment-specific basis, the company, on the US side of operations, saw a revenue decline of around 2.6% to $16.2 billion, compared to $16.7 billion in the first nine months of 2019, owing to challenging interest rates and reduced sales in the current environment.

Similar trends could be seen in Aflac Japan where net premium income was ¥336.5 billion for the quarter, or 3.3% lower than a year ago, mainly due to limited-pay products reaching paid-up status.

Total revenues in yen declined 2.8% to ¥407.9 billion. Pre-tax adjusted earnings in yen for the quarter declined 11.6%, largely due to a reduction in revenues and an increase in expenses in the quarter.

The insurance company remains positive about its operating environment in the medium and long term. This is the reason that the company decided to hike its dividend by around 18% in November of 2020.

Aflac Is Diversifying Into Pet Insurance

The Covid-19 pandemic has distressed the earnings and revenue of majority of corporations, and Aflac is no exception to it. However, it has adopted a proactive approach to deal with the situation, which includes prudent capital management, a voluntary retirement scheme for the employees, expected downsizing of the workforce by 10 %, and other different cost-cutting measures that may save the company up to $50 million every year.

Moreover, the company has been intensely focusing on adopting a new approach towards product development, while making considerable investment into distribution platforms, and automation.

Also, factors such as an aging population, social security benefits and similar trends are going to help Aflac and its peers in the foreseeable future.

The company is fast diversifying its operations, a fact attested by the introduction of Aflac-Branded Pet insurance in the US market.

The company is aiming for growth and efficiency in both, the US and Japanese, markets. In the Japanese market, the company is focusing on a refreshed product lineup and a new ecosystem, as well as reduced face-to-face activities to promote virtual sales for increased productivity and revenue.

In the US market, the company’s focus centers around group policies, dental policies, and digital D2C technologies.

To put it in perspective, the pandemic has acted as a catalyst for the insurance company to introduce many of its future virtual distribution technologies and D2C techniques.

On the liquidity side of things, Aflac continues to remain strong in terms of capital with access to one of the better portfolios on the market.

While the pandemic has dealt a more brutal blow to Aflac in comparison to some of its peers, the company’s investments are high-quality diversified and they offer some of the highest return on capital and have some of the lowest cost of capital in the industry.

The company is A-rated, which gives it easy access to capital, and, having learnt a lesson from the pandemic, is quickly introducing new methods of doing business.  It operates in two very mature markets, and it is well-established in both of them, thereby securing its future income.

Risks of Investing in Aflac

Irrespective of the fact that Aflac did noticeably well during the Covid-19 pandemic, its performance was still more subdued in comparison to a few of its peers.  It was largely due to reduced face-to-face activity, which led to an over 35 % decline in third quarter sales.

The company still continues to feel the impact of temporary business closures and lack of access to work. Historically, a large majority of the insurance company’s agents have generally relied upon face-to-face meetings to engage small business owners and their employees.

And with the employees working from home, the company’s sales suffered.  However, the company remains optimistic about a better performance in the fourth quarter, compared to the second and third quarters, as the newly-introduced vaccines lead to gradual opening up of the economy. 

The company’s US benefit ratio was significantly affected by policyholders’ limited visits to the doctor. The benefit-expense ratio, calculated by dividing a company’s costs of insurance coverage by the revenues from premiums charged for that coverage, is frequently used to determine the financial strength of an insurance company.

Also, the company, in order to reduce its workforce and cut costs, offered a voluntary separation package to eligible employees who expressed an interest. The voluntary separation program also played a part in impacting the company’s profit margin.

However, the company is treating it as a near-term headwind and expects it to help the company as it enters 2021.

Are Aflac Competitors A Threat?

With over six decades of existence, a strong presence in the US and Japan, a solid marketing strategy and, of course, its mascot, a cute little duck, Aflac is a very familiar name in the insurance business.

When you are unable to work because of an injury or illness, this supplemental insurance provider can help you fill in the gaps of income till your disability paychecks start arriving.

Here, we look at few of the top competitors of Aflac.

MetLife [NYSE: MET] is a great option for investors who wish to have an insurance stock in their portfolio. It’s the largest US life insurer, and the company is one of the highest dividend payers amongst its peers.

The New York City-based insurance company boasts of a solid revenue and income record, having increased both for four consecutive years. 

MetLife has an easy-to-understand business model and plenty of cash and liquid assets to tide over big crises such as the Covid-19 pandemic.

In September, the company announced that it would be acquiring Versant Health for $1.7 billion, thus establishing MetLife as a “top-three Player in the U.S.-managed vision care industry,”.

The company, with a solid history of strong returns on equity, is currently trading at a very low valuation which makes it a good investment choice for the long-term investor.

Markel [NYSE: MKL] is a specialty insurer, underwriting specialty insurance products. The company has an interesting investment strategy, offering what is called excess and surplus (E&S) insurance policies, which usually cover high-risk businesses.

It also offers reinsurance, which basically means insurance for insurance companies.  Markel reported earned premiums of $1.39 billion in its latest quarter in comparison to $1.3 billion it reported in the same quarter a year ago, with a combined ratio of 97.

A combined ratio of under 100 means the company’s premiums exceeds its claims, which attests to its disciplined underwriting process.

Moreover, the company, instead of focusing solely on safe investments like high-grade bonds, invests in both, public and private, companies.  As such, it follows the business model of Berkshire Hathaway, and, for this reason, it is often called the “baby Berkshire”.

When you’re just dipping your toes in the insurance sector, it is prudent to stick with industry leaders like UnitedHealth [NYSE: UNH], which is the nation’s largest health insurer.

The insurance company is poised to do even better under Biden, who has made it clear that he wants to strengthen the Affordable Care Act (ACA), which, in turn, will provide additional support for Medicaid expansion, with Medicaid accounting for over 13% of UnitedHealth Group’s total medical membership.

Also, Biden promised he wants to enable Americans to buy a public health insurance plan similar to Medicare. UNH already has a large Medicare business, and if Biden comes good on his promise, it will provide a huge boost to the company.  The company is also known for its dividend yield, having increased its dividends ever since 2010.

Is AFL A Buy: The Bottom Line

Insurance stocks are always a good addition to an investor’s portfolio. Good insurance companies are known for producing solid long-term returns. Moreover, insurance is a business that does well both, when the economy is going strong, and also during recessions. Aflac is a company known for delivering decent returns on your investment.

Before the pandemic struck, insurance sales were generally made through face-to-face interaction, where an agent would first comprehend an individual’s situation, understand their situation, propose a solution and then close the sale. However, the pandemic has forced the company to adopt virtual means to close sales. 

The good thing is that the company has accelerated investments to enhance the tools available to reach out to customers through digital means. This seems to be paying off as the company has been doing well in its key markets in Japan and the US.

Aflac is also a good dividend payer, which means a well-supported income stream for investors. The supplemental insurance giant, known for its prudent liquidity and capital management, currently offers a dividend yield of around 3%.

Aflac’s dividend track record is supported by the strength of its capital and cash flows with dividend consuming only about 28% of the company’s trailing earnings. What it means is that, irrespective of the depressed revenue and profit during the pandemic, the company has no cause for concern over meeting its dividend obligations. Despite the current disruption triggered by the virus, the company has ample opportunities to recover over time by raising rates on renewals and new policies.

At the same time, the company has remained tactical in its approach to share repurchase, buying back $400 million of its shares in the third quarter.

At current valuations and despite a comeback of sorts, Aflac is still undervalued at around 11%. Analysts expect the insurance giant’s earnings to grow around 5% until 2022. To conclude, the underlying quality of the stock, a secure path for future growth and impeccable dividend record, makes Aflac worthy of your attention.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.