Aflac Stock – Put Selling Reward VS Risk

Trade ideas this week might include the insurers once again. Among my favorite is Aflac Stock (ALF) in my US Portfolio and Sun Life Stock (SLF) in my Canadian Stock Portfolio. The poor employment numbers on Friday just added fuel to the fire on interest rates for insurers and is hammering Aflac Stock and all insurers again.

Concise Explanation Of The Problem

The collapse of insurance company stocks hinges on the belief in interest rates. In simple terms, these insurers like Aflac Stock make a lot of their income from investing in interest rate sensitive assets. When the credit crisis hit in 2008 interest rates collapsed to historic lows. At the outset insurers like Aflac Stock did well as they were holding bonds that overnight grew in value. But within a short time once any capital gains were realized from the sale of bonds, insurers like Aflac Stock had to invest again and this time at historically low-interest rates. As well, most insurers like Aflac Stock also invest in risky assets, like stocks. When stocks plummeted in 2008 to early 2009 these insurers saw their balance sheets shrink including Aflac Stock. Many insurers have spent the last 5 years working to protect their balance sheets from future market gyrations. All of this has meant poor returns for insurers. 

Last fall investors thought they sense a possible return to higher interest rates which would means better returns for the insurers so they pushed up the valuations in the insurer companies including Aflac Stock and Sun Life Stock. Unfortunately the employment numbers on Friday were so bad that it is now becoming obvious to investors that historic low-interest rates may be with us for much longer than anticipated. This has meant big declines in insurers stock and big opportunities for investors such as myself to scoop up some excellent put option premiums when selling puts against Aflac Stock and others.

Aflac Stock  (AFL) 1 Month Chart

The one month chart of Aflac Stock shows the decline that is underway.

Aflac Stock 1 month

Aflac Stock 1 month chart showing decline in stock valuation

Sun Life Stock (SLF) 1 Month Chart

A Canadian insurer I have in my Canadian Stock Portfolio is Sun Life Stock (SLF). The decline has created excellent Put Selling opportunities.

Sun Life Stock 1 Month Valuation

Sun Life Stock 1 month chart showing decline in stock valuation

Manulife Stock (MFC) 1 Month Chart

Another Canadian insurer that has never recovered from 2008 to 2009 credit crisis is Manulife. The Manulife Stock rose recently to above $15 at which time I sold my shares in the retirement portfolio. On Friday I bought some shares and will begin to accumulate shares again in my retirement portfolio.

Manulife Stock 1 Month Chart

Manulife Stock 1 month chart showing decline in stock valuation

Reward VS Risk With AFLAC Stock (AFL)

All the insurer stocks are being hammered again as investors flee, worried about interest rates staying lower than originally thought. As well if the stock markets should correct at this stage it could be more severe than anyone realizes which could drive these insurers stock much lower including Aflac Stock.

Because of this it is important to weigh reward against risk and know the type of investor you are before contemplating trading within the insurers.

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