Aflac Inc., AFL Financials 59.53 Stuart Hatlen Devin Mabra Carson Scovin John Budreau Uyen Tran
Thesis We aim to hedge its portfolio s volatility as well as to diversify into a foreign industry. We view a $2000 investment in Aflac Inc. as a Dividend Play as well as a Value Play.
Corporation Summary Finances- Health/Life Insurance Business Holding Company American Family Life Assurance of Columbus Japan- 1974 #1 in policies in force since 2003 Cancer, Life, Medical United States- 1955 #1 in supplemental insurance Nov 17th, 1955 John Amos, Paul Amos, Bill Amos Columbus, GA Accident/Disability Plans Cancer Expense Plans Short Term Disability Plans Sickness Hospital Indemnity Plans Fixed Benefit Dental Plans... Term, Whole, Hybrid
Management and Ownership CEO and Chairman: Daniel Amos, since 1990 Risk Management B.S. U Georgia. Grew Net Revenues from $2.7b to $23.9b to date since 1990 Has met or exceeded operating earning per share all 24 years as CEO Fortune 100 best companies 16 year consecutive to date Fortune most admired companies since 2001 Ethisphere Magazine most ethical companies 8 times to date. CFO and Treasurer: Kriss Cloninger III Actuary Society and Bus Mgmt B.S. UT Austin CFO since 1992 President: Paul Amos II Economics B.s. Duke U COO to President in 2006. 10 year Board Exp. at Aflac Japan relations Majority Shareholders
Additional Quant Summary Balance Sheet Income Sheet
Macro to Micro Analysis Baby Boomer Statistics may boost demand for income protection products. Big Players USD vs Yen- Overview of relationship over time Affordable Care Act- US Japan- Bonds, QE, Rates and Future U.S.- Bonds, QE ending, Future
SWOT- Strengths Median Age in Japan: 84 (1st in world) Credit Ratings Regulation- Dodd-Frank Act Not believed to be part of Systemically important institutions
SWOT- Strengths (Cont.) High cancer insurance market share in Japan Affordable Care Act has helped spur growth in supplemental insurance due to gaps in coverage
Weaknesses Life Insurance Industry average ROE has been below cost of equity since 3Q 2008 due to low interest rates Aflac ROE has been above WACC since then fixed Income hurting from lower rates High concentration of business in Japan increases business risk
Opportunities Industry leader and pioneer for cancer insurance in Japan partnership with Japan Post and expanding cancer insurance from 3,000 outlets to 10,000 this year expect demand to continue to rise 80% of Japanese publicly traded companies use Aflac
Threats Yen exchange rate very volatile opened positions in foreign exchange forwards and options to hedge some risk Ease of getting supplemental insurance in U.S. growing demand led to Jan14 bill passed to ease access to insurance Japan s economy and new QE consumption tax hike
Growth Yen vs Growth Dollars Premium Income: Rose 6.8% to 1.46 trillion Yen Vs. a 12.7% decline in US Dollars to 15 Billion Total Revenue: Rose 7.8% to 1.73 trillion Yen Vs. a decline of 11.8% to 17.7 billion US Dollars Pretax Operating Earnings: Rose 13.6% to 359.9 trillion Yen Vs. a decline of 7.1% to 3.6 billion in US Dollars Premiums, benefits & expenses, and most assets & liabilities in Japan business denominated in Yen!
Fundamental Analysis Product Use and Overview Insures more than 50 million people via worksite, retail, and home Insures against asset loss, income loss, and supplemental medical Founded in 1955, Japan 1974 Concentrated in voluntary supplemental products Empirical Analysis Long-term liabilities = long term investments in life insurance industry, low-interest rate environment impacts fixed-income market Quant Analysis Excluding Yen, 5.2% increase on operating earnings per diluted share, 2% ahead of target in 2012 Exceedingly strong RBC & SMR ratios Dividends expected to grow at rate of EPDS, excluding Yen impact 2.9 billion in new annualized premium sales Revenues grew at 5.7% in 2013, excluding yen impact. ROE in 2013 was 25.8% exceeding target. Comparable in next section. Generally locked into fixed-income assets (bonds) difficulties in low interest rates environments Volatility and uncertainty still surround implementation of ACA, making small businesses hesitate to change plans Excluding Yen, metrics beat objectives Expanded share repurchase to increase liquidity in low interest rate environment (800m share repurchase in 2013)
Fundamentals Chart
Aflac Japan 1,600 new sales agencies in 2013 Sales alliances with Dai-ichi Life, Bank Channel, Japan Post Group, Daido Life Product offerings: Life (term, whole, Hybrid) Child Endowment, Fixed Annuity Supplemental offerings: Cancer, Medical (DAYS & EVER) Market leader of cancer and medical insurance
Aflac U.S. New premiums of $1.4 billion sold in 2013- Blamed on ACA implementation Product categories: Income-Loss protection, Asset-Loss protection, and supplemental medical Growth 2013: Premiums 3.1%, revenues 2.9%, pretax operating earnings 4.1% Sell group and individual insurance to all sizes of business, but focus on <100 employees
The past decade...
Comparables Dvd, P/e, ROE focus
*Revenue, EPS, Dvd Paid Charting Comparables
Financial Modeling DCF Assumptions: Forecasted year over year convergence to past 5 year average (revenue, EBITDA, EBIT) Conservative Liabilities Growth rate due to Other Liabilities volatility (overall conservative) Tax Rate conservatively above effective year over year rates Valued: 82.30 pps with 7.80% (current) wacc and 3.5% long term growth rate Sensitivity Analysis 9% wacc 12% wacc (10 ) 15 %wacc (08 ) 18%wacc 2% LTGR $51.15 $34.69 $24.76 $20.08 4% LTGR $74.48 $41.40 $29.01 $22.04 6% LTGR $124.11 $52.55 $35.11 $24.69 8% LTGR $190.89 $74.75 $41.79 $28.38
Financial Modeling DDM+CAPM Assumptions: Aflac will always give off growing Dividends without Dividend-less quarter AFL Beta and Expected Market Return have corresponding time frames Value: 76.00 pps 7% Dividend Growth Rate to $1.52 2014 Dividend, 9% Discount Rate Variable Analysis 4% DGR 5% 6% 7% 8% 9% 10% 5% 6% 7% 8% 9% 10% 11% $159.60 $79.80 $53.20 $39.90 $31.92 $26.60 $161.20 $80.56 $53.25 $40.28 $32.22 $162.64 $81.32 $54.21 $40.66 $164.16 $82.08 $54.72 $168.68 $82.84 $167.20 DR ~$59 $83.51
Financial Forecasting Weighted Average Price Target: 50% Weight to DCF $82.30 30% Weight to DDM-CAPM $76.00 20% to professional 12 year PT $66.00 Price Target of $77.15
Portfolio Forecasting AFL Beta.92 (SPX) Old Financials Port Beta: 1.261 (SPX) New Financials Port Beta: 1.194 (SPX) Old Financial Portfolio Weight: 13.8% New Financial Portfolio Weight: 17.2% 12mth professional PT: MS +2.5% BX +32% WRB -1.2% CYN +.8% Weighted 12mth Growth Projections: 12.82% *The closer Beta is to 1, the more it follows (SPX). (Higher- More Volatile)
Technical Reading 3 Year
5 Year
...again Dividend Play Value Play Diversify Portfolio Hedge Volatility