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From The Survey: Aflac Inc.
Aflac (AFL), the proud possessor of one of the best-known advertising icons in the United States, is the leading provider of guaranteed-renewable insurance in the United States and the number one life insurance company in terms of policies in force in Japan. It earns around 75% of pretax profits in Japan, with the balance coming from the United States. All told, its policies cover about 50 million people, mostly in those two countries.
The company's products offer limited benefits for fairly small premiums and pay cash directly to the policy-holder whenever an insured event occurs, regardless of whatever other insurance the customer may have. They are called “voluntary” and “supplementary”. For the most part, they are considered “third-sector’’ policies, as distinct from full life and health policies (first sector) and property and casualty (second sector).
In Japan, lead offerings include cancer, general medical indemnity, living benefit, and ordinary life insurance. Aflac Japan distributes its policies through a network of independent and affiliated corporate agencies and independent brokers. Aflac Japan’s distribution network comprises over 18,000 agencies employing about 125,000 licensed agents. The division also offers its policies through 90% of the banks in Japan, which contributed 45% of the sales, by new annual premium, in 2012. Finally, Aflac Japan is starting to sell through Japanese post offices. Beginning with around 1,000 Japan Post branches by 2014, the arrangement could include over 20,000 branches in a few years. Aflac has called the deal potentially “game changing”.
In the United States, principal products include accident, cancer, hospital, dental, vision, life, and short-term disability plans. Aflac US distributes products through an internal sales force and outside brokers totaling about 76,000 salespeople. Most policies are sold through worksites and paid for via payroll deductions. Through an acquisition in 2010, the company expanded its access to the group insurance market, which also gave it more entrée to midsized and large corporations. While individual policies are all portable, group policies usually terminate when an employee leaves the organization through which he bought the policy. Historically underrepresented in the broker market, Aflac US is actively seeking to increase sales through brokers and has put together a team to offer new products to the group insurance market.
Aflac’s earnings grew faster than its competitors’ before the recent financial crisis, which, as at other financial service companies, caused the company to write down many investments. The company has largely disposed of riskier assets, and its capital ratios are well above those required by Japan’s regulator and the credit ratings agencies. Earnings growth, however, has slowed to mid-single digits in both Japan and the United States, due largely to the lingering effects of the recession, which has slowed employment growth, and rock-bottom interest rates, which have reduced yields on new money invested. Since most earnings are in Japan, the yen/dollar exchange rate also affects dollar results. For 2013, Aflac now anticipates earnings per share in U.S. dollars to slip 6% to 9%, if the recent yen/dollar exchange rate holds. For 2014, the company looks for EPS growth of 2% to 5% on a currency-neutral basis, boosted by repurchasing around 2% of the shares. Higher interest rates, if they occur, would also help by lifting investment returns on new money.
This company has a commanding market share in Japan, and the new selling arrangement with Japan Post offers access to new customers who do not work for companies or use banks where they could buy Aflac policies. As the population ages and Japan’s government tries to rein in healthcare cost increases, Japanese consumers will likely seek to protect themselves through plans offered by Aflac. In the United States, the implementation of the Patient Protection and Affordable Care Act will probably not hurt the company, as the cheaper policies offered under the Act will still leave gaps that can be partially filled by Aflac policies.
Aflac has lifted its dividend for 31 consecutive years, and we believe strongly that it will extend that record for years to come, though probably not at the double-digit rates it managed some years ago. Though its recent yield of around 2.3% is not generous, it is above the Value Line median, and the company can certainly raise the payout modestly in 2014. Investors wishing exposure to Japan and some decent dividend income might want to take a look at Aflac.
At the time of this article’s writing, the author did not hold positions in any of the stocks mentioned.