Aflac embodies the antithesis of the greed that nearly sank the U.S. financial system.
-Jim Cramer of “Mad Money” and www.TheStreet.com
Aflac (AFL): Security Analysis
By:
Cary Cates, Rob Thompkins, Sheri Webb, Annie Gaona, Fred
(Matt) Miller, and Dale Bullough
FINA 4200
Dr. Liu, CFA
October 27th, 2009
1
THEME/EXECUTIVE SUMMARY
Aflac Inc.’s principal business is supplemental health and life insurance policies. Aflac’s
policies cover out-of-pocket medical expenses. The policies pay covered claims, in the form of cash,
direct to the policy holder so the policy holder can keep their life on track when accident and/or illness
might dictate otherwise. Aflac is the number one provider of supplemental life and health insurance in
the U.S. and Japan and as a company operates as two segments: Aflac U.S. and Aflac Japan. It is
the number one provider of supplemental life and health insurance in both the U.S. and Japanese
markets. The Health Insurance industry and more specifically the supplemental Health Insurance
industry will see abundant growth in the short-term and the long-term especially in the United States
where the Baby-Boomers will require an increasing amount of health care for the next 20 plus years.
Aflac Inc. was founded by the three Amos bothers in 1955 in Columbus, GA. The company
started by offering a cancer policy in the fifties but since the 1980s, Aflac has added many
new insurance policies, including accident, short-term disability, hospital intensive care, hospital
confinement indemnity, long-term care, lump sum cancer, lump sum critical illness, specified health
event, life, dental and vision. Aflac has a sales force of more than 74,000 Licensed Agents (Annual
Report, December 31, 2008) represented in all 50 U.S. states. Some highlights of Aflac’s accolades
are:

Aflac is rated AA- by Standard & Poor, AA- by Fitch Ratings, and Aa2 (Excellent) by
Moody’s for financial strength.

A.M. Best rates Aflac as A+ (Superior) for financial strength and operating performance.

In its annual survey rating of the popularity of life insurance companies, the Nikkei
Financial Dailyranked Aflac Japan number one in the Low Premiums and Ability to
Develop New Products categories, and number five overall. The responses of 1,086
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publicly held nonfinancial companies rated each life insurance company in eight
categories (January 5, 2007).

In 1999, Aflac became a founding sponsor of the American Association of Cancer
Research (AACR) and has an ongoing commitment with the AACR to continue to
expand the travel awards program and other initiatives designed to meet the needs of
early career cancer investigators.

Fortune Magazine’s list of the 100 Best Companies to Work For in America (June
2007).

The National Underwriter ranked Aflac as #1 “Individual Health Leader,” #1
“Guaranteed Renewable,” and #3 in “All Health Insurers” based on Premiums Earned.
(“The NU top 200” Aug. 18/25, 2008)

In May 2009, the Reputation Institute in its Global Reputation Pulse report named Aflac
as the most reputable company in the global insurance industry for the second
consecutive year. In April, it recognized Aflac as the most ethical company in the U.S.
insurance industry for the second consecutive year.

More than 93% of Aflac’s fixed-income securities were investment grade at
June 30, 2009 (Quarterly report, 2009).

Who hasn’t seen an Aflac commercial isn’t familiar with the “Aflac” name. This means
very high brand recognition.
The above list is only small snap shot of why Aflac is such a tremendous company and why it
will see such strong growth in the future. On Friday October 23, 2009 Aflac (AFL) closed at $44.41
and retreated a bit in after hours to $44.36. It is showing resistance around $49.00 currently but we
believe this price to be very low compared to the intrinsic value of Aflac Inc. NOW, is the time to buy
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AFL. Aflac and the whole Health insurance industry are about to explode. Many of these companies,
Aflac included, will quickly set new company and industry stock price records. Buying Aflac now and
holding it for the foreseeable future is just a smart investment…plain and simple.
BUSSINESS ANALYSIS
Profile
Aflac was founded in 1955 in Columbus, GA and incorporated in 1973. It is a general business
holding company and acts as a management company, managing the operations of its subsidiaries
by providing services and making capital available. Its business is supplemental health and life
insurance, which is marketed, sold, and administered through its subsidiary, American Family Life
Assurance Company of Columbus (Aflac), operating in the United States and as a branch in Japan
(Aflac Japan). Aflac’s insurance business consists of two segments: Aflac Japan and Aflac U.S. Aflac
Japan sells supplemental insurance products, including cancer plans, general medical indemnity
plans, medical/sickness riders, care plans, living benefit life plans, ordinary life insurance plans and
annuities. Aflac U.S. sells supplemental insurance products, including accident/disability plans,
cancer expense plans, short-term disability plans, sickness and hospital indemnity plans, hospital
intensive care plans, fixed-benefit dental plans, vision care plans, long-term care plans and life
insurance products. In October 2009, the Company acquired Continental American Insurance
Company.
4
Macroeconomic and Industry Analysis
Although many think there may be a W shaped recovery it seems safe to say that we are out
of the depths of this recession. This recession cost millions of jobs, homes, and the stock market lost
close to 50% its value. Our positive evaluation of the economy moving into the future primarily reflects
that the Gross Domestic Product, a measure of the value of all goods and services produced, came
out of free fall in the second quarter of 2009 by falling a mere 1.0% compared to a 5.4% and 6.4%
decline in the two prior quarters (Q IV, 2008 and Q I, 2009). Businesses decline in inventories are
probably the only reason Q II GDP was negative at all. Now businesses will need to restock
inventories to meet demand boosting GDP and rendering a GDP growth for Q III and Q IV 2009.
Growth in GDP will officially end the recession and the US economy will slowly work its way back to
pre-crash growth.
Actual
5
To support a smaller decline in GDP numbers there is also an increase of steadiness in
manufacturing and non manufacturing, a bottoming out of the housing market, and a much smaller
increase in unemployment. Further evidence that we through the worst and should see growth soon.
Early recovery will be highly discriminating in what industries grow first. We are still losing jobs,
consumer spending and credit conditions are still tentative at best and house prices, on average, are
still falling. Industries like Healthcare and more specifically Life and Health Insurance E.g. Aflac
should be some of the first to see strong growth. We will cover the Insurance and Aflac in more detail
later. We must first deal with overall economic growth.
Forecast
6
Given that we believe the recession is over we expect to see slow overall economic growth.
We are looking to see a 2% or better increase in GDP for the remainder of 2009. We expect an
anemic 2-3% growth throughout 2010 with a return to stronger growth in 2011 led by comeback in the
housing market and an increase in pay-rolls for the first time. Unless the economy is has shoulder
drastically high inflation we expect to see a return to normal growth in the middle of the next decade.
Milton Friedman suggested that the demand side of the economy represented by an upward
sloping line is like a string and the harder you pull down on it (the deeper a recession or decline in
output) the harder or faster it will snap back or recover. (see graph)
The graph to the left and the three scenarios
noted represent different scenarios for the future of
the economy. Scenario 3 is the concern where
demand never returns to the old normal but
American’s ravenous appetite for consumption will
not let that happen. Scenario 1 is the most likely and
we believe we are at the bottom of the decline on
that line. However, the snap back in Friedman’s
string has not happened yet but it will. We should see
that line start getting back to normal 5-6% GDP in 2012-2013.
Although a return to normal growth is a bit into the future, the trend of negative growth has
stopped. One of the dangers as this trend turns is Inflation. Any dangerous Inflation seems far off in
the distance and more recently deflation has been a bigger issue. Government intervention seems to
7
have stopped serious deflation but higher inflation as unemployment decreases may be the price.
How much inflation becomes a problem in the future remains to be seen.
Corporate profits are seemingly on target as most corporations are reporting to meet or be
near reported targets. Evidently this is due to cost cutting measures but cutting the fat can only
benefit these companies as we move towards a brighter future and higher profits should be in the
future.
The stock market, a leading economic indicator seems to be through the worst since the Dow’s
low of 6,500 in March, 2009 down from a high of around 14,000. The Dow has been holding strong
over 9000 for awhile and despite some volatile days and weeks of trading the market has been bullish
overall since bottom in March. Although the economy as a whole will lag a good bit behind Wall St, it
is a good indicator of a rebound.
In conclusion, caution is the theme here leaning towards cautious optimism. The US economy
seems to have seen its darkest days and it’s the perfect time to start investing aggressively in the
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stock market. That being said we believe the Insurance business and specifically Aflac, with its
specialty niche products, will be one of the Industries to lead coming out of The Great Recession.
Industry Analysis
Famed Legg Mason Inc. stock picker Bill Miller said, “now is the best time to buy healthcare
(includes L&H insurance) stocks since the early nineties,” in an interview with Barron’s in early
October (Reuters). His top picks included in this article include Aflac (AFL) amongst such others as
Aetna (AET) and United Health Group Inc. (UNH). Miller’s chief reason for this claim is that, “the
Obama administration’s new plan on healthcare is likely to boost the numbers of people enrolled in
managed healthcare plans (Barron’s Oct, 2009).” According to a wealth of supporting data Mr. Miller
looks to be right on the money.
According to the Bureau of Labor Statistics (BLS), a US government entity, “Health care will
generate 3 million new wage and salary jobs between 2006 and 2016 [(a 21.7% increase)], more than
any other industry.” That number alone would cover nearly half of the 6 million jobs lost during this
recession. The primary driver of this is the growing number of older US citizens, “with much greater
than average health care needs, will grow faster than the total population between 2006 and 2016 .”
Adding to the issue is an increase in life expectancy too. So not only will there be more retired people
to take care of but they will be living longer. A much larger amount of older Americans needing
healthcare along with increasingly complicated medical systems and related technologies creating
many new jobs Health Care will be one of the leading industries driving new economic growth in the
future.
How does all of this add up to a benefit to the Life and Health Insurance Industry and Aflac
specifically? All those new jobs and growth in the Health Care industry are driven by sick people. The
drastic majority (90%+) of these people will have to have insurance in order to afford this care and
that all means more policies, more annualized premiums (insurance business unit measure), and an
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overall massive demand for insurance products. Specifically this benefits Aflac due to their unique
niche in this business.
Products
Aflac offers the following policies basic policies:

Accident
o E.g. broken finger, cut on your arm, or ripping off an arm in the wood chipper

Short-term Disability

Cancer/Specified Disease
o Cancer and riders for specific diseases

Hospital Confinement Indemnity
o Hospital stay coverage

Specified Health Event
o E.g. Heart attack, stroke, coma, etc…

Hospital Intensive Care

Dental

Life
o Several options including term and lump sum

Hospital Confinement Indemnity
o Specific hospital coverage

Vision
 All Afalc policies are guaranteed renewable and fully portable.
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Aflac offers the same basic policies in the U.S. and Japan with changes in names and minor
changes due to local laws but the key to how these policies work and what makes them different from
all other major medical insurance is the same. Major medical coverage pays Dr.s and Hospitals with
no regard to policy holder’s incidental out of pocket expenses like mortgage/rent, car payment, food,
credit card bills, etc… Aflac’s policies cost a fraction of what major medical policies cost (from as little
as $8 per month) and they pay the policy holder, directly (check in the mail), for covered claims. Aflac
insures their policy holder’s lives and quality of life while they deal with accident and/or injury.
The need for Aflac’s supplemental health policies will only grow with America’s growing health
needs. We believe that Aflac’s policies will even outpace regular insurance demand due to the fact
that companies are being forced by Federal legislation to carry more of the expense of insuring their
employees and will be forced to pare down coverage. People will be forced to pick up extra coverage
on an ad-hoc basis. Aflac fits this niche perfectly and with its ala carte list of event specific policies
people are able to tailor their personal exposure to risk as they see fit. An additional benefit is that
Aflac does not cost companies a dime because the policy premiums are voluntarily pre-tax pay-roll
deducted and actually save companies money on their taxes giving them a large incentive to offer it
to their employees. Aflac is poised to reap large benefits in the current and coming health insurance
landscape.
Business Analysis Conclusion
Aflac has a second to none marketing campaign and brand. Love it or hate the Aflac duck is
ubiquitous in American and Japanese culture. The darkest days of “The Great Recession” seem to
have come and gone. The Healthcare i.e. insurance industry will be one of leaders coming out of the
recession and into the future of normalized growth in the middle of the next decade. Aflac sits firmly
atop a growing niche in the health insurance industry with 37% of the supplemental insurance
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industry (Aflac US). Aflac has a spotless image, strong to excellent financials, and is, at worst, a hold
or neutral by all the analysts. We are Bullish on Aflac(AFL) for now and the foreseeable future.
FINANCIAL ANALYSIS
When deciding to invest in a company, it is very important to understand what the financial
statements and ratios are saying. In this section, we will discuss some important ratios for Aflac
(AFL) in order to better determine if we should invest in this company. Then we will take a look into
their financial statements and project what they will look like over the next 5 years.
Ratios
Aflac
Industry
P/E Ratio
Total Debt to Equity
Operating Profit Margin
Net Profit Margin
Return on Assets
Return on Equity
17.65
31.37
10.49
6.91
1.61
16.56
23.48
24.34
1.03
0.75
0.58
2.96
Table XXX
The first ratio in Table XXX, the price to earnings (P/E) ratio, is known as valuation ratio. This
ratio largely reflects the market’s optimism for the growth of the company. As we can see, AFL’s P/E
ratio is smaller than the industry’s which could have various meanings. It could mean that the market
believes the industry is growing faster or will grow faster than Aflac. It also says that there is a higher
demand for other companies in the industry then there is for AFL. The next ratio is total debt to equity
which tells us that AFL uses approximately 31% of its equity to pay its debt. Another way to look at
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this ratio is to say that about 69% of its assets are financed with debt. When compared to the
industry, which finances about 76% of its assets with debt, we find that AFL seems to be more
conservative when using debt. Operating profit margin, which is computed by dividing operating
profits by sales, gives us a good idea on how well the company is generating revenues while
managing expenses (higher is better.) The industry’s operating profit margin is 1.03% meaning that
other firms do not keep their expenses down as well as AFL. Net profit margin is similar to operating
profit margin in that we can derive them both from the income statement. However, net profit margin
will tell us what percentage of sales the firm gets to either pay out in dividends or keep as retained
earnings. A small net profit margin is considered to be risky because of the chance that sales might
decrease causing net income to go into the red. When comparing AFL to the industry, AFL seems to
have a great advantage but it is difficult to compare net profit margins of various firms because each
firm has differing operating and financing arrangements. The last 2 ratios to discuss are return on
assets (ROA) and return on equity (ROE). These two are considered profitability ratios and are
related to each other. Both ratios use net income to determine the amount of net income generated
for each dollar of assets and each dollar of equity. For AFL, management is generating $0.0161 for
every $1 in assets and $0.1656 for every $1 in equity (Foundations.) This is very good compared to
the industry. Over all, the financial ratios for AFL indicate that the company is doing well but there are
still more steps to be taken before deciding to invest or not.
After taking a close look at the ratios, we will turn to income statement projections for the next
quarter and fiscal year. Presented in Appendix XXX, are the common-sized income statement for the
last three fiscal years and the first two quarters of 2009 as well as the common-sized balance sheet
for 2008 and 2007, and the first and second quarter of 2009. According to Reuters, the 5 year sales
growth rate for Aflac is 7.66% but in Table YYY below we have used 7% in our projections in order to
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stay conservative. There are many factors that can influence the growth of a company. Those
factors influencing Aflac have already been discussed in the analysis of the business section above.
Projections
3Q09
2009
2010
2011
2012
2013
Total Revenue
Benefits and Expenses
Operating Margin
Income Tax Expense
Net Income
4566
3902
664
227
436
18789
16006
2783
1007
1776
20048
17399
2649
1099
1551
21393
18664
2729
1184
1545
22830
19728
3102
1278
1823
24364
20868
3496
1362
2134
EPS – Basic
0.93
3.81
3.33
3.31
3.91
4.58
Table YYY
STOCK VALUATION
We have applied several different valuation methods and scenarios to Aflac Inc’s common
stock in order to find what we expect to be a fair market value. Interestingly, the various methods
produced dramatically different results. The primary methods of valuation that we used were the
dividend discount model, the price to earnings ratio (P/E), and the book value. There are some
different factors that affect the valuation of each method’s application to AFL, which we will discuss.
The book value of Aflac is a rough estimate of the value of each share if the company were to
be liquidated today. Because this is not an outcome that is expected, this is only partially useful to
us. Its primary use is that, with all things held constant, it estimates a floor for the stock price. The
book value for Aflac on June 30, 2009, was $13.58 per share. A couple of important issues come up
when determining the stability of this number. First is the fact that Aflac is highly leveraged while at
the same time its long term assets are 85% investments. This means that if its investments were to
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perform poorly then the equity in the company, which is about 1/10th the value of the liabilities, would
be rapidly wiped out. Second, by being so highly leveraged, the company will probably not have
access to low interest rates if further debt is needed. This produces dangers on both sides of the
balance sheet. The assets face the possibility of rapid deterioration while the liability side holds a
heavy debt payment load. Because of this, we think this number is useless when valuing Aflac.
The price to earnings ratio brings about some very interesting observations. The P/E ratio
determines how much each dollar of earnings is worth to shareholders according to the stock price.
Another way to look at the ratio would be that if all earnings were paid out to shareholders in
dividends, then the P/E is the number of years it would take to breakeven. The trailing P/E ratio of
Aflac, Inc. has held around 17 to 18 in the last couple of years, and as of October 17, 2009, was 18.1.
What is interesting about this is that it is expected that Aflac’s earnings will dramatically improve over
the next year. The P/E of around 18, while higher that the average of the S&P 500, does not appear
to be higher in anticipation of this earnings increase because it is closely aligned with the long term
trend. The company’s earnings in 2008 were $2.64 but the consensus estimate for 2009 is earnings
of 4.75 per share. This increase in earnings, which is not expected to be a one-time gain, gives the
company a forward P/E ratio of 9.5. If we expect the stock price to increase upwards in order to keep
a P/E ratio of 18 then the value of each share would be $85.50 in 2009 and $94.32 in 2010, an
increase of 108.6% from the current value. If we instead use a conservative P/E ratio of 14 to reflect
the possibility of slower growth, we still get a forward stock price of $66.5 in 2009 and $73.36 in 2010.
The conservative P/E would give us a return of 62.3% over two years. The P/E ratio, assuming
accurate forecasts of earnings, gives us a strong “buy” signal for this stock.
The third method of stock valuation that we applied to Aflac, Inc.’s common stock was the
dividend discount model. We used the 100 year average return of the S&P 500 to get an expected
market return and the yield on a 30 day T-Bill for the risk free rate of return. Using these numbers we
15
have determined the required return for Aflac to be 21.87%. The dividends that Aflac has paid from
October 1984 to August 2009 have been extremely stable. During that 25 year period of paying
dividends Aflac has only missed one payment in February 2003. They also only cut the amount of
the dividend once in 1985 and quickly corrected that to a dividend increase by the time of the next
payment. Outside of these two instances, Aflac has also managed to raise its dividend at least once
per year and sometimes more often than that. This leads me to have strong confidence in the
continuation of Aflac’s dividend and dividend growth. Over this 25 year period the company has kept
the dividend growing at a rate of 17.92% per year. All said this gives Aflac, Inc. a constant dividend
discount value of $32.22. Because of the jump in earnings expected from Aflac over the next year,
we experimented on the affect that could have on this valuation. The current payout ratio of Aflac is
41% of earnings. We recalculated the dividend discount model on the speculation that the company
could boost dividends along with the increase in earnings in order to keep the payout ratio at 41%.
After that one time boost we used a calculation of the long term dividend growth of 17.92%. This
resulted in a valuation of $33.89. Based on these calculations we’d give Aflac a rating of “Hold.”
The two primary models of valuation used for Aflac give highly divergent recommendations.
After studying these two valuations we believe the P/E evaluation to be more accurate and that the
intrinsic value of Aflac as a company moving into the future is in the high $60s and better. We are
very bullish on Aflac and give it a strong “buy” for the short-term and the foreseeable future.
 Excel spreadsheets are in the Appendix on page24
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BULLS vs. BEARS
A bull market is one in which prices of a certain group of securities are rising or are expected
to rise. It is a prolonged period where the investment prices rise faster than their historical average. In
such times, investors have faith that the market will continue to rise in the long term. Bull markets can
happen as a result of economic recovery, an economic boom, or investor psychology.
(Investopedia.com) A bear market is an opposite of bull market; it is characterized by falling prices
and an expectation that they will continue falling. When the market is bearish, it leads to a slow down
of economy together with a rise in unemployment and inflation. In both the cases, people invest.
Those who invest in a rising market and think that it will continue to be so are called bullish investors
while those who trade in falling markets and think that it will continue to be so are known as bearish
players.
As indicated in the Business analysis; the stock market which is a leading economic indicator
to be in the worst since the Dow’s low of 6500 in March 2009 from a high of 14,000. And this is one
of the times were Aflac could be perceived as being a Bear market. Inflation, business decline in
inventory which lead to a decline in GDP, unemployment rate increase, and a decrease in consumer
spending are all causes for a company to demise at fast rate. Aflac was affected by such but it is
recovering at a fast pace. Although a return to normal growth is a bit into the future, the trend of
negative growth has slowly come to an end and Aflac will satisfactorily recover from if at any rate,
being perceived as a Bear market institution or investment.
In the United States, Aflac underwrites a range of insurance policies, but is perhaps best
known for its payroll deduction insurance coverage, which pay cash benefits when a policyholder has
a covered accident or illness. This is a great plus for Aflac specially during such hard economic
times…who does not like to hear the word cash or a check in the mail soon? This is one of the many
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reasons why Aflac is part of the Bull market. Not many insurance providers can use such connotation
freely. ”Aflac is committed to defining the market terrain rather than letting it define them”.
(www.Aflac.com) The worst of The Great Recession seems to be over and recovery is slowly
emerging. The Healthcare i.e. insurance industry will be one of the leaders coming out of the
recession and into the future of normal growth in the middle of the next decade, if not sooner. At the
end of 2008, the corporation's total assets were more than $79 billion, and the company insured more
than 40 million people worldwide. ” Aflac is the largest provider of guaranteed-renewable insurance in
the United States and the largest insurance company overall in Japan, when measured by individual
insurance policies in force”. (http://en.wikipedia.org/wiki/Aflac) Aflac stays firmly afloat and on top in
the health insurance industry with a 37% of the supplemental insurance industry (Aflac USA). Aflac
has close to spotless credentials, strong financials, and like in the business analysis conclusion is, at
worst, on hold or neutral by most or all analysts. It is safe to conclude, that we are “Bullish” on Aflac
(AFL) for now and the future to come.
THE MOAT
The moat is the competitive advantage that one company has over other companies in the
same industry. (Investopedia.com) This term was coined by renowned investor Warren Buffett. The
wider the moat, the larger and more sustainable the competitive advantage. By having a well-known
brand name, pricing power and a large portion of market demand, a company with a wide
moat possesses characteristics that act as barriers against other companies wanting to enter
into the industry.
It has been determined that Aflac is part of the Bull market and one of the reasons that was
discussed was their competitive advantage. "Aflac ranks among the best financial services firms
18
because they continue to find ways to meet consumer expectations while generating superior
economic profit. By combining their clear and simple marketing message with a competent network of
independent agents, they are protecting their profits with competitive moats in both Brand Perception
and Economies of Skill. Our consumer data shows Aflac is a fresh alternative to the traditionally
bureaucratic insurance agency," said Gary A. Williams, CEO & Founder of W Ratings. (Aflac.com)
Economic profit and Aflacs marketing is one of their huge fortes that has kept company's ability to
keep competitors from penetrating their moat market for an extended period of time. Below are some
of Aflac’s competitors listed from NASDAQ:
Company Name
Symbol : Market
Last
Sale
Net
Change
%
Change
Share
Volume
Today's
High/Low
52 Week
High/Low
P/E
Ratio
Market
Value
(mil.)
Aflac Incorporated
AFL : NYSE
$ 42.88
1.53
3.45%
3,780,369
$ 44.74
$ 42.56
$ 49.36
$ 10.83
9.7
20,047.47
Principal Financial Group Inc
PFG : NYSE
$ 27.06
1.15
4.08%
2,819,887
$ 28.84
$ 26.93
$ 30.87
$ 5.41
N/A
8,630.41
UnumProvident Corporation
UNM : NYSE
$ 20.75
0.59
2.76%
2,859,782
$ 21.63
$ 20.62
$ 23.25
$ 7.61
8.17
6,876.84
PartnerRe Ltd.
PRE : NYSE
$ 78.18
0.38
0.48%
693,411
$ 79.09
$ 77.98
$ 81.71
$ 53.92
6.76
4,547.50
Assurant, Inc.
AIZ : NYSE
$ 30.01
1.14
3.66%
1,552,137
$ 31.84
$ 29.92
$ 36.57
$ 12.52
N/A
3,538.99
Reinsurance Group of America,
Incorporated
RGA : NYSE
$ 46.99
1.40
2.89%
979,856
$ 49.40
$ 46.82
$ 49.40
$ 21.27
8.21
3,419.70
StanCorp Financial Group, Inc.
SFG : NYSE
$ 38.82
0.57
1.45%
464,918
$ 40.20
$ 38.68
$ 42.71
$ 13.79
8.04
1,908.27
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Out of the above mentioned insurance providers neither of them really sticks out unless you
look at their stock price you can clearly see who is atop of the industry. But besides the numbers
you see in Cash Flows, Stock Exchange, customer satisfaction ratings, or any financial
statement…who does not recall the Aflac commercial with their famous duck and its quack? Their
marketing and lower and different pricing methods sets them apart from the rest.
RISK
Aflac as an insurance company that provides coverage to employees through their employers
is facing a tremendous hurdle with the government’s proposed healthcare reform. CEO Danial Amos
sounds convinced that the risk is minimal in his 2008 annual report. He states that Japan has a
government health care system and they have managed to insure 1 out of 4 households there. This
assessment by Amos may be optimistic , but accidental death and injuries sustained at the workplace
may still need coverage beyond what the government proposed ghanges.
Aflac is also facing the same rebound hurdles as other financial institutions. Amos rejected his
2008 bonus citing the low stock price of the company as the main reason. This action sets him above
some of his peers. Aflac’s competitors include American Fidelity Assurance Company and Asahi
Mutual Life Insurance Company which are both privately held. Other public competitors include Unum
Group, Wesco Financial Corp., and Assurant Inc. These are their main competitors and while Aflac
is currently the leader the market cap and return on equity, they still face pressure from these
competitors.
20
The economy still poses a risk to Aflac, but they are combating that by sticking to past and true
strategies of promoting their product as a necessity not as a luxury. This strategy has been the
mainstay of their sells to individual households and even though the economy is still struggling this is
a valid point.
INVESTING STRATEGY
BUY! BUY! BUY! Is the investment strategy for this stock and we mean buy now and hold.
Aflac does show potential to grow in the economy as time progresses. Taking either P/E ratio for
Aflac has shown growth when reflecting future stock prices. Since March the price of the stock of
Aflac has more than quadrupled. So if you invested in Aflac over the past year you have seen your
money grow drastically. Lately the short term has shown tremendous growth in the stock, which can
scare away new traders but in the long term Aflac will continue to grow. In the history of dividends
for Aflac payments have been missed once in 2003 and they cut the amount of paid out in 1985. This
shows strong stability in the company, because each time there has been a raise in dividends paid to
stockholders. Right now we suggest a Strong buy in the stock of Aflac, and if you already have stock
in Aflac hold and do not sell.
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NOTES

October 7, 2009: Aflac raised a little over one million dollars through Facebook for the fight against Pediatric
Cancer. This campaign was the largest in the history of the Causes on Facebook. Aflac taking the time to raise
the money helps show they are here to help the world and not just in the insurance game.

August 24, 2009: Aflac starts a new campaign commercial titled “soccer”. The message in the commercial is
designated to help provide a solid defense against unexpected medical bills. The message is to help remind you
that the duck has your back.

July 30, 2009: Aflac’s shares hit a six month high. The results exceeded what was forecasted for this period in
the second quarter. The forecast was $1.14 and the result was actually a $1.20. These results indicate that Aflac
can generate enough capital to absorb future investment losses.
22
RESOURCES
www.valueline.com
www.bls.gov Bureau of labor statistics
www.aflac.com
www.reuters.com
www.google.com/finance google finance
Bodie, Zvi. Kane, Alex. Marcus, Alan. Investments, New York, NY: McGraw-Hill Irwin, 2005.
23
APPENDIX/EXCEL SPREADSHEETS
Current Payout Ratio 41%
K=
21.87%
What if AFL kept ratio at 41% to reward shareholders?
That would require an acceleration of dividends from the TTM. After the calculated 1 year accelerated
growth, then the long time average for AFL dividend growth will resume.
To calculate this we used the supergrowth dividend discount growth.
EPS Est.
2009
2010
Payout Ratio Dividend
$4.75
0.41
$1.95
$5.24
0.41
$2.15
TTM
Dividend
%
Increse
1.09
2009
1.95
0.788990826
Dividend
TTM
1
2 to ~
Growth Rate
1.09 0.788990826
1.95
0.1792
2.29944
0.1792
PV Calcuations
FV
PV
1.95 1.312928238
58.96 32.57369619
1
2 to ~
FMV =
33.88662443
This assumption has only increased the value of the shares moderately.
TTM is Trailing Twelve
Months
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Financial Ratios
Aflac
Industry
Valuation Ratio
P/E Ratio
17.65
23.48
Financial Strength
Total Debt to Equity
31.37
24.34
Profitability Ratios
Operating Margin
Net Profit Margin
10.49
6.91
1.03
0.75
Management Effectiveness
Return on Assets
Return on Equity
1.61
16.56
0.58
2.96
Dividends
Dividend Yield
Dividend 5 Year Growth Rate
Payout Ratio
2.45
26.19
40.51
0.14
3.25
18.02
Growth Rates
Sales - 5 Year Growth Rate
EPS - 5 Year Growth Rate
7.66
12.23
0.56
0.44
25