Uncertainty In Commercial Real Estate Will Increase Credit Risk And Affect Net Earnings

Key Takeaways

• Volatility in yen-dollar exchange rates poses financial reporting risks for Aflac, affecting revenue without proper hedging and capital management.
  
• U.S. dental and vision product challenges may limit near-term sales growth and earnings potential amid heightened competition and underwriting discipline.
  
• Aflac shows strong profitability in Japan, new product initiatives, enhanced capital efficiency, and solid financial management, supporting potential earnings growth and shareholder returns.

Catalysts

Through its subsidiaries, engages in the provision of supplemental health and life insurance products.

• Higher volatility in the yen-dollar exchange rate may impact Aflac's financial reporting, posing risks to revenue figures if not followed by proper hedging and capital management.
  
• Anticipated pressure on floating rate income driven by lower SOFR rates could potentially impact Aflac Japan's net investment income and thereby compress pretax profit margins in 2025.
  
• Potential challenges in reinvigorating U.S. dental and vision product lines, especially following prior implementation setbacks, could limit near-term U.S. sales growth and earnings potential, complicating efforts to scale profitable new business lines.
  
• Heightened competition and underwriting discipline in the U.S. market could constrain sales growth, impacting revenue and potentially leading to slower improvements in expense ratios despite ongoing cost management initiatives.
  
• Uncertainty in the commercial real estate market threatens asset values and increases credit risk in Aflac’s investment portfolio, which could affect net earnings if defaults rise or if longer-than-expected recovery impacts capital reserves.

Aflac Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Aflac's revenue will decrease by 2.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 28.8% today to 21.0% in 3 years time.
• Analysts expect earnings to reach $3.7 billion (and earnings per share of $7.61) by about March 2028, down from $5.4 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.4x on those 2028 earnings, up from 10.9x today. This future PE is greater than the current PE for the US Insurance industry at 13.2x.
• Analysts expect the number of shares outstanding to decline by 3.81% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.36%, as per the Simply Wall St company report.

Aflac Future Earnings Per Share Growth

Risks

• Aflac Japan demonstrated strong financial performance with a 15.5% increase in pretax adjusted earnings and a record 36% pretax profit margin in 2024, indicating resilience in its revenue streams and margins.
  
• The company plans to launch a new cancer insurance product in Japan, which includes comprehensive coverage and consultation support services, potentially driving sales growth and enhancing earnings.
  
• Aflac has been successful in integrating and deriving profits from its reinsurance operations and other strategic initiatives, improving capital efficiency and potentially enhancing net margins.
  
• The U.S. segment showed improvement in its pretax profit margin, expenses, and premium persistency, indicating a potential for stable or increased earnings despite challenging market conditions.
  
• Aflac maintains strong capital ratios and liquidity, with the ability to allocate $2.8 billion to share repurchases and continued dividend growth, suggesting robust financial management and potential shareholder return stability.

Valuation

• The analysts have a consensus price target of $105.071 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 $122.0, and the most bearish reporting a price target of just $93.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $17.8 billion, earnings will come to $3.7 billion, and it would be trading on a PE ratio of 16.4x, assuming you use a discount rate of 6.4%.
  
• Given the current share price of $108.41, the analyst price target of $105.07 is 3.2% 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.