“We Can Have the Financial Solvency To Take Hits If We Need To”

In the interest of full disclose, I’ll tell you that I recently bought some shares of AFLAC (AFL) at a price of $42.77. I’ve said that I think it’s very underpriced so that shouldn’t be a big surprise.
The stock is down on, I believe, overblown worries about its exposure to Europe. AFLAC’s CEO Dan Amos recently spoke with the crew at Motley Fool.

Aflac’s bottom line is highly correlated with the returns it gets from investing the proceeds from its insurance business. Market volatility makes deciding where to invest a challenge.
As a general rule, Amos said, the company tries not to invest more than $250 million in any one company or country — taking currency fluctuations into account. He said Aflac’s largest investment is in Japanese government bonds. The company invests roughly $20 million per day in Japan within its overall portfolio. (One out of every four households in Japan has an Aflac policy and 80% of Aflac’s earnings and invested income stems from Japan.)
However, Japan doesn’t really have a market for long-dated maturities. “You can find them, but 20-year dated maturities are almost impossible to find,” said Amos. “So to match assets against liabilities, we ultimately had to go other places.”
As such, Amos said, the company does have exposure to Europe via companies and country bonds, including the PIIGS countries: Portugal, Italy, Ireland, Greece, and Spain. Aflac owns shares in the top three banks in England, including Barclays (NYSE: BCS); the top three banks in Germany, including Deutsche Bank (NYSE: DB); and banks in other countries such as Spain. (You can view a list of Aflac’s European exposure here.)
“So, we’ve spread our risk,” said Amos. “[But] it puts us in the light a lot of times because if someone says, ‘Do you own Greece?’ Yes, we own Greece. It’s part of the European common market. We thought that would be safe. So that’s what we’ve done.”
But Amos said his main focus is whether a business’s or country’s bonds will continue to pay. “There can’t be what I call a ‘run on the bank’ in our business,” he said. “There are no cash values. So as long as those bonds are going to pay, then ultimately we’re in a very good position. And we can have the financial solvency to take hits if we need to because we made over $2 billion in profits this year.”

Let me also add that Nicholas Financial (NICK) is currently going for $7.88 a share which is more than 5% below its book value.

Posted by on June 15th, 2010 at 12:33 pm


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