According to the firm, Aflac remains a core holding within the U.S. life sector due to its ability to deliver a 20%-plus ROE along with operating EPS and BV CAGRs twice the peer group average. But, as evidenced by repeated sales shortfalls and with growth in annualized premiums in-force having shrunk to the 3%-4% range, is strongest years may now be behind it. Capital pressures from the investment portfolio as well as weak sales continue to be risks and may temper valuation expansion in 2010.
There are no changes to Citi's 2010E-12E of $5.50, $6.00 and $6.75 respectively, which were earlier increased following their preliminary review of 1Q10 results. They continue to view Aflac as a core holding for long-term investors within the life sector given its 20%-plus ROE and ability to deliver BV growth at a pace 2x the peer average. While they continue to question the unnecessary level of concentration risk taken within the investment portfolio, they still very much believe that Aflac possesses more than sufficient strength, as it demonstrated in 2009, to weather the current storm as it were and avoid an external capital raise. As such, the pull-back in the shares following the 1Q01 earnings release has created an attractive entry point to acquire the shares of a proven above average long-term performer. Citi's revised target equates to just 10x their 2011E, a valuation well below the Aflac’s historic average of over 13x and at the low end or what they estimate is still an attractive 10%-12% long-term growth rate. At a current price of 8.3x 2011E they view Aflac’s shares as too compelling a bargain to pass up
Citi views the nearly 6% drop in the share price following the release of what were relatively good 1Q10 results to have been an over-reaction by the market to concerns about European sovereign risk within the $72.3 billion investment portfolio. The size of Aflac’s exposure to Greece and Greek banks of $1.3 billion clearly caught the market by surprise. But, even a complete write-off of the entire stake would amount to only about 5 months of annual statutory earnings of around $2 billion and they estimate would still leave the company with a statutory RBC of over 450%. In fact, they estimate Aflac could withstand as much as $1 billion of after-tax investment losses in 2010 before management might be forced to raise capital to protect the company’s credit ratings. More importantly from our perspective are the indications they have seen over the past year that Aflac may have finally turned the corner with its Japanese operations which account for about 75% of its earnings and generate an estimated 30% after-tax operating ROE.
Notablecalls: I like this one, think AFL can trade towards $51.50/sh today. May go higher if the general market plays ball.
Note that Greek equities are in rally mode this morning. Should help the sentiment.