Expanding Markets And Calculated Innovations Propel Growth Across Japan, Bermuda, And The US

Key Takeaways

• Aflac's strategies in Japan, including new products and revitalized marketing, aim to boost revenue and market share while improving profit margins.
  
• Growth in the U.S. and reinsurance in Bermuda focus on enhancing profitability, capital returns, and shareholder value through disciplined management and tactical capital deployment.
  
• Aflac faces currency volatility, declining Japanese premiums, rising U.S. benefit ratios, and distressed real estate investments threatening margins and profitability.

Catalysts

Through its subsidiaries, provides supplemental health and life insurance products.

• Aflac's recent introduction of the Tsumitas product in Japan is expected to drive growth by attracting younger customers and cross-selling additional third sector policies. This strategy should boost both revenue and improve profit margins in the Japanese market.
  
• Aflac's continued development of its reinsurance platform in Bermuda is anticipated to enhance cash flows and deployable capital, which could favorably impact earnings and capital returns over the long term.
  
• Aflac's U.S. business is experiencing strong growth in group life, absence management, and disability products. This growth, along with disciplined expense management, is expected to contribute to increased net margins and improved profitability.
  
• The company's balanced focus on profitable growth and tactical capital deployment, including ongoing stock buybacks, aims to bolster earnings per share by enhancing shareholder returns and maintaining strong capital ratios.
  
• In Japan, Aflac is celebrating its 50th anniversary with an effort to revitalize sales through increased marketing efforts and potential new product launches. This initiative is intended to stimulate revenue growth and expand market share in the long run.

Aflac Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Aflac's revenue will grow by 2.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 22.0% today to 21.2% in 3 years time.
• Analysts expect earnings to reach $3.9 billion (and earnings per share of $7.69) by about November 2027, up from $3.8 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $3.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.9x on those 2027 earnings, down from 16.1x today. This future PE is greater than the current PE for the US Insurance industry at 13.5x.
• Analysts expect the number of shares outstanding to decline by 2.68% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.14%, as per the Simply Wall St company report.

Aflac Future Earnings Per Share Growth

Risks

• Aflac reported a loss of $0.17 per diluted share on a U.S. GAAP basis for the quarter, largely due to increased foreign exchange-related losses from the yen. This could affect net margins and earnings if currency volatility continues.
  
• The decline in net earned premiums in Japan by 10.5% can impact revenue, especially if similar trends persist. This has been attributed to internal transactions and changes in the policy makeup.
  
• Persistency in Japan's policies in force decreased slightly, and while not drastic, continued declines could impact future revenue stability.
  
• In the U.S., the benefit ratio increased significantly year-over-year, which is driven by lower remeasurement gains and increasing claims utilization, potentially affecting net margins and overall profitability.
  
• Aflac's investment strategy includes a significant portion tied to commercial real estate, which is under distress. Current low valuation marks and foreclosure processes could impact earnings if recovery expectations are not met.

Valuation

• The analysts have a consensus price target of $102.67 for Aflac based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $124.0, and the most bearish reporting a price target of just $90.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $18.6 billion, earnings will come to $3.9 billion, and it would be trading on a PE ratio of 15.9x, assuming you use a discount rate of 6.1%.
  
• Given the current share price of $110.44, the analyst's price target of $102.67 is 7.6% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.