AFL Aflac
Excellent Japan-heavy franchise, but low book growth and yen drag leave the stock above fair value.
The story
Aflac runs a dominant supplemental health franchise in Japan (about two-thirds of earnings) and the US, with low-volatility cancer and medical policies and disciplined underwriting. Reported ROE of 16.5% is flattered by AOCI losses that shrink book equity and by strong recent benefit-ratio experience; adjusted for that, through-the-cycle ROE runs in the low-to-mid teens. The balance sheet is conservative, though large holdings of JGBs and yen-denominated assets bring currency and rate risk. Revenue is shrinking in dollars (about -3% a year over five years) because of yen weakness and an ageing Japan, while heavy buybacks hold book growth down.
I raised ROE slightly, from 13% to 13.5%, because reported returns have stayed well above 15% for several years, but I still discount the AOCI-depressed book and peak-level benefit ratios. Book growth stays low because roughly 100% of earnings is paid out through buybacks and dividends, and terminal growth of 2.5% sits well below the risk-free rate. Beta stays at the industry anchor of 0.9, which gives a cost of equity of about 9.3%.
Value drivers
| Return on equity (normalized) | 13.5% |
| Book-value growth (Y1) | 3.0% |
| Terminal book growth | 2.5% |
| Beta | 0.90 |
| Failure probability | 1.0% |
| Cost of equity | 9.3% |
Valuation bridge
| PV of excess returns | 6.71B |
| PV of terminal excess | 4.67B |
| Equity value | 40.46B |
| ÷ shares → per share | $80.71 |
News
bearish -0.30 · 8 articles
- 3 Reasons AFL is Risky and 1 Stock to Buy Instead
- Globe Life's Health Premium Growth Strengthens 2026 Outlook
- 4 Insurance Stocks With Two Big Profit Engines Backing the Dividend
- Life Insurance Stocks Q2 Recap: Benchmarking Aflac (NYSE:AFL)
- Can MetLife's Group Benefits Segment Maintain Its Momentum?
- Is Aflac (AFL) Fairly Valued Following Mixed Earnings And Another Dividend Increase?
- Aflac’s (AFL) Net Earnings Jumped 37.7%, Yet Adjusted Earnings Actually Fell
- GL Outperforms Industry, Trades at a Discount: How to Play the Stock
Projected excess returns on equity
| Yr | Book equity | ROE | Excess return | PV |
|---|---|---|---|---|
| 1 | 29.49B | 13.5% | 1.24B | 1.13B |
| 2 | 30.37B | 13.3% | 1.20B | 1.00B |
| 3 | 31.27B | 13.0% | 1.16B | 887.65M |
| 4 | 32.17B | 12.8% | 1.11B | 780.58M |
| 5 | 33.08B | 12.5% | 1.07B | 682.65M |
| 6 | 34.00B | 12.3% | 1.01B | 593.26M |
| 7 | 34.93B | 12.0% | 954.13M | 511.83M |
| 8 | 35.86B | 11.8% | 892.12M | 437.83M |
| 9 | 36.80B | 11.5% | 825.67M | 370.72M |
| 10 | 37.74B | 11.3% | 754.73M | 310.02M |
Key risks
- Further yen depreciation shrinks dollar earnings and book
- Japan's demographic decline and new-product competition erode the Aflac Japan premium base
- Benefit ratios normalize upward from unusually favorable levels, compressing margins
Catalysts
- Yen recovery as BoJ normalization lifts translated earnings and investment yields
- Continued large buybacks and dividend increases at a lower share price