KBW Upgrades Aflac To Outperform, Says 'Playing Defense'

• AFLAC Incorporated AFL shares are down 12 percent in the recent sell-off, and are down 8 percent year-to-date.
• Keefe, Bruyette & Woods’ Ryan Krueger upgraded the rating on the company from Market Perform to Outperform, while establishing a price target of $68.
• Citing the company’s lack of equity sensitivity, below-average interest rate risk, and an improved investment portfolio, Krueger stated that AFLAC is among the more defensive life insurers.

Analyst Ryan Krueger said that the company is generating “industry-leading” ROEs in the low 20s ex. currency.

AFLAC has guided capital deployment of to $6.3-$7.5bn from 2015-2017. The low end of the range represents 80 percent of the projected earnings, which is higher than the industry average of 65-70 percent. The high end represents a possible upside of $1.2bn, or 15 percent of annual earnings, Krueger said.

In the report Keefe, Bruyette & Woods noted, “[W]e forecast low-single-digit top-line growth in Japan with stable to slightly declining margins. The U.S. outlook is more favorable; penetration is low and AFL is the market leader. We expect mid-single-digit intermediate-term U.S. growth with stable margins.”

Following the recent sell-off, AFLAC’s shares are down 12 percent, in-line with equity-sensitive life insurers. “With no direct equity sensitivity, below-average interest rate risk, and an improved investment portfolio, we view AFL as among the more defensive life insurers,” Krueger wrote.

The analyst believes that AFLAC’s shares should trade at a “modest premium” in view of the company’s lower-risk liabilities and higher FCF, offset partially by lower growth. “We also see some multiple upside for the overall life group, and thus value AFL at 10.5x forward EPS or 65-70% of the market multiple.”