Is Aflac Stock A Buy?

AFLAC Incorporated (NYSE:AFL) is the largest provider of supplemental insurance in the United States. The company underwrites a wide range of policies, including payroll deduction insurance, pet, accident, life, cancer, vision, and more.

You’ve seen its commercials with the duck screaming its name, but what about the company as an investment? Is Aflac stock a Buy?

The company is making moves to do grow in spite of a faltering economy. For example, its $200 million investment for a 9 percent stake in pet insurance company Trupanion Inc (NASDAQ:TRUP).

It also expanded its vision and dental coverages and partnered with technology company Mindtree to develop the MyAflac Mobil app to enable a simplified and streamlined mobile claims process.

The loss ratios are a key metric investors need to examine. We examine those to determine if Aflac can ensure investors can squeeze out profits or if it will leave them at a loss.

Aflac Supplemental Insurance Policies Are A Win

Aflac provides supplemental insurance policies. This is additional insurance coverage to help cover out-of-pocket expenses not covered by traditional medical insurance. This includes dental, vision, short-term disability, hospital, and critical illness insurance.

Typical health insurance plans cover 60 percent of medical bills after your deductible is covered. This deductible is often set high to save on medical insurance premiums. But it creates a lot of out-of-pocket expenses.

Its most popular coverage is payroll deduction coverage, which ensures you’re still paid if injured on the job. The name “Aflac” is an acronym for American Family Life Assurance Company of Columbus.

The company makes its money by collecting insurance premiums and investing the “float.” This is when the company has excess money collected from its policies that doesn’t need to be paid out. It’s essentially a negative interest loan and why insurance companies do so well financially.

Aflac’s loss ratios and business model were good enough to be approved as an insurance carrier in Japan, a rarity for U.S. insurance companies. When operational expenses like marketing and claims are factored in, the company has a combined ratio just under 1.0 for most quarters.

And we’re all familiar with the Aflac Duck. Originally voiced by comedian Gilbert Gottfried, the Aflac Duck debuted on January 1, 2000 and has been a staple of television and video streaming advertising since.

But does that mean its stock is a good buy?

Is Aflac Stock A Buy?

Aflac share price has a fair market value of $44.09 per share according to a financial analysis that forecasts revenue growth and costs out in time and discounts cash flows back to present day.

Analysts are less enthusiastic about future prospects for the company with 6 rating it a Hold and 2 assigning a Sell rating.

The company has paid a consistent quarterly cash dividend for over 30 years, and it continued this streak through the pandemic. It even raised its quarterly cash payout to $0.33 effective February 2021 to give it an annual dividend payout of $1.32.

In the third quarter of 2020, the company generated $5.7 billion in revenues, a slight year-over-year increase from 2019. This gave it $2.5 billion in net earnings, which includes a $1.4 billion tax deferral benefit and 117 million in net investment gains.

Adjusted earnings clocked in at $994 million.

The company also bought back $400 million worth of shares in its common stock for the quarter, or 10.9 million shares. It retains authorization to sell another 110.0 million shares.

Aflac held $146.1 billion in cash and investments heading into the 2020 holiday season, which includes nearly $5 billion in cash on hand. This gives it a strong hold on its approximately $120 billion in liabilities, but there’s no smooth sailing by investing in this insurance company, even when it looks so strong.

Aflac Insurance Policy Liabilities Can Be Cyclical

Insurance companies like Aflac are cyclical and very dependent on market conditions. In the current environement, Aflac may draw more policyholders and premiums, but it also faces higher payouts that inevitably drop its loss ratios.

Every claim filed takes away from potential profits, and the pandemic could cause a high number of claims.

And the company placed a big bet on pet insurance. The U.S. Census Bureau estimates 92 percent of people carried health insurance coverage. By comparison, only about 2 percent of the nation’s dogs and cats are insured.

This could be a growing market, but it could also be a small niche that never grows. And because pets have significantly shorter lifespans than their human counterparts, claims could occur more frequently.

Veterinary costs aren’t cheap, and the company’s investment in Trupanion created share price exuberance. Investors should be wary they don’t end up on the wrong end if that bubble pops.

And it has a slew of peers to fight against.

Aflac Vs MetLife Vs AllState

Although Aflac provides supplemental insurance, it still competes with many traditional insurance carriers. Its rivals include MetLife, Allstate, and Old Mutual supplemental disability insurance plans.

Luckily for Aflac, all these companies are subject to the same market risks and conditions it has. This means their loss ratios will likely suffer along with it.

The big difference maker between each of these companies will inevitably be marketing. From the Aflac Duck to Allstate’s “Are you in good hands?” tagline, each company spends billions on marketing campaigns to be the most memorable.

It’s an expensive business, but Aflac shows no signs of giving up yet.

Is Aflac Stock A Buy? The Bottom Line

Aflac is a major insurance company and the largest provider of supplemental insurance in the U.S. Its policies cover all the out-of-pocket expenses typically left in traditional policies. This includes coverage for short-term disability, cancer, and more.

The company struggled to recover during the slowing economy, and it could face some big payouts if it drags on. Still, it has a huge cache of investments and cash on hand to pay its way through any problems it faces. So long as it manages loss ratios, it can create sustainable profits for a long time to come.

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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.