Unscrambling Monday's Egg

Unscrambling AFLAC (NYSE: AFL)

Flying AFLAC through the Chicks' Dozen
by Chick Megan

NOTE: For the month of June, we will be going into detail on the companies that we recently considered for our quarterly Chick "buy." June was the month of buying. We ended up purchasing stock in Medtronic (MDT) on June 3, 2001, but there were many many great companies that didn't get our majority vote. We wanted to highlight them as it was a close call and they are still up for consideration for our next buy in September. For more on the companies that were considered, and what we'll be featuring all month, check out our summary.

There may be no bigger advocate of disability insurance than that of a professional athlete. In a millisecond a clean, open-ice hit on a hockey player can send his career spiraling. An unstable landing after a fantastic three-pointer can be a basketball player's worst nightmare. At the drop of a hat even the most gifted athlete's can succumb to horrific injuries that end their careers. So whether you're Troy Aikman retiring due to a concussion or Joe Schmoe retiring a week after you were drafted the loss can be insurmountable. Both players will have to begin all over again in a completely different career... one in which they probably have no training. After years of time and money spent reaching for their dream, they are suddenly faced with the question of where their future lies. It is a frightening time. Which is why I liked what I found out about an International Holding Company called AFLAC (American Family Life Assurance Company). Take a second to check out an article I wrote back in March and then let's take a step further. We'll try running it through the Chicks Dozen and see if everything turns out Ducky...

1. Buy What You Know I'll admit that until I saw the now famous quacky duck commercial advertising this product I had no idea they existed. I must have been the only one though; seems that everyone has come across this company at some time or another. You must admit, however, that the commercial really helped to get their name out there. People from 5 to 65 seem to be unable to refrain from mimicking that silly duck screaming "AaaaaFFFFFlllllllaaaaaccccc!!!"

2. Keep It Simple Sister  Could we explain this to a fourth grader? I would think so. If you are familiar at all with insurance, it isn't difficult to understand the concept. AFLAC is a supplemental insurance for accident and liability, hospital indemnity, long-term care, and intensive care. You can purchase this along with what you currently have for insurance. Let me show you how important this can be to you and your family. 

Most insurance simply cover costs to your hospital and to your doctor. With AFLAC, the policyholder receives cash benefits (unless otherwise assigned) to help cover incidentals and uncovered expenses when you can't afford to. Think that can't happen to you? Look at the following list and think again.

AFLAC helps cover the following:

• Deductibles

• Co-payments

• Non-medical expenses from nursing services to travel to and from treatment centers

• Out-of-pocket expenses such as car payments, mortgages, utilities and daily living expenses.

• Out of Network Charges if your managed care plan won't allow you to see a different doctor

• Loss of earning power should you be unable to work

3. Industry The insurance industry is an industry with which we are all familiar. Remember a few years back when President Hilary was going to get us universal healthcare? Me neither. But it sure got the discussions going, didn't it? (All talk, no action) Anyway, you get it.even if you don't get it.

4. Leader In its Field It's right up there, with it's biggest competitor being UNUM Provident. Domestically they are number two to UNUM, but overseas they can't be touched. Especially in Japan... in case you skipped over my last article about AFLAC, take note that they are THE number one foreign provider in that country.

5. Repeat Profitability  Whether you purchase your insurance monthly or yearly, it is a profit (and a phrase) that will be repeated... AAAAAffffffffflllllllaaacccc!!!!!!

6. Gross Margins  K, ladies... listen up, 'cause this is a little different than what we're used to. Some companies, like this one, are not geared up for this equation. Because they provide a service rather than a product, you cannot measure their Gross Margins. There is not way to quantify their "cost of goods sold," therefore no way to calculate the formula. You will see this in other industries, such as Financial Services, as well.

7. Net Margins

Net Income (178) / Sales (2421) = .07%

AAAAwwwwYuuuuccckkkkk!!

8. Cash vs. Long Term Debt

Cash (1075) / Long Term Debt (1035) = 1.03x

Nice!

9. Flow Ratio  Another interesting lesson here. After checking out their balance sheets, I noticed there was no clear indication of their current assets or liabilities. So how, pray tell, would I figure their flow ratio? I decided to check out the website for the U.S. Securities and Exchange Commission and see what their rules are pertaining to Current Assets and Disclosure Issues. Under the section for Corporate Finance, I discovered this paragraph:

Actuarial Services. Closely tracking the SECPS prohibition on actuarial services, actuarial-oriented advisory services are limited only when they involve the determination of insurance company policy reserves and related accounts. Certain types of actuarial services can be performed if the audit client uses its own actuaries or third party actuaries to provide management with the primary actuarial capabilities, management accepts responsibility for actuarial methods and assumptions, and the accountant does not render actuarial services to an audit client on a continuous basis.

In essence, because there is no way to truly determine hard and fast numbers when considering this industry, i.e., when someone will expire, when someone will collect on disability, there is now way to pinpoint what is actually current. The insurance industry relies on actuaries to statistically calculate risks, life expectancies, etc. Without the ability to use actual numbers in the formula, and rather than obfuscating* the issue, they simply can't provide those numbers.

10. Increasing Growth

Sales this quarter (2421) - Sales last quarter (2489) = X (-68)

(-.68) / Sales last quarter (2489) = -0.02

What's Up With That?

11. Strong Management and Operating History  AFLAC began as a family-owned business founded originally by brothers Paul, John, & William Amos.  Paul Amos, who still worked as Chairman up until April 2001, spent 46 years with the company and recently passed the family torch down to Daniel Amos, who will serve as Chairman and CEO. During Daniel Amos' tenure as CEO for AFLAC, the company saw revenues increase from $2.7 billion to $9.7 billion! 

Since the company's inception in 1955, it has expanded from a small time operation in Georgia and Alabama to a real leader, operating in all 50 states and internationally. AFLAC was only the second company in history to be licensed to sell insurance products in Japan. They now employ 35,000 licensed agents and are Number One in Payroll Marketing.

12. Buy On Sale
52 Week High: $37.47
52-Week Low:  $22.53
Average:  $37.47 + 22.53 = $60
$60/2 = $30

AFLAC is currently trading at $33.50, so this would not be considered a sale.

In retrospect, the power AFLAC has in this industry over its rivals is immense. Again, no one touches them in the Japanese market, where they continue to reign. The overall picture of this company is pretty Ducky, but is it Chicky?  Well, it doesn't meet all the Chicks criteria at this time but now that we've become familiar with them and gotten our feet wet, it certainly qualifies as one to watch. Being a big fan of the company I will happily oblige. Hopefully they'll continue to be successful and my next report will turn out even more swimmingly...