A Superior Life Insurance Company
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Aflac (NYSE: AFL) is not an average life insurance company. It has a superior management team that has made some very smart strategic decisions, such as an early entry in the attractive Japanese market and a unique distribution method. Thanks to these decisions and an efficient capital management policy, Aflac generates higher profitability than its competitors, which makes it a compelling alternative for investors looking for a high-quality bet in the life insurance sector.
Aflac generates nearly 75% of its premiums from Japan, and it has a rock solid position in cancer insurance in that country, where it holds a nearly 80% market share. Japan has a universal government-mandated health care system, but copayments have been rising because the system is underfunded.
The land of the rising sun is a very interesting market for the Aflac's business -- an aging population produces higher demand for supplemental policies, and Japanese customers are generally very sticky. Persistency in Japan is around 95%, compared to a ratio around 75% for the United States. The average Japanese customer stays with Aflac for nearly 20 years.
Aflac uses a different marketing strategy. Instead of using sales agents to target individuals, the company sells its services to corporations and the premiums are deducted from the employees' salaries and Aflac pays the benefits when required. This model generates lower costs, which translate into lower prices in comparison to competitors.
In the insurance business, knowing how to manage risks is a critical ability that influences not only a company's profitability levels, but also its financial stability and even its chances of survival under demanding scenarios. Aflac's resiliency after the 2011 tsunami in Japan is a strong reflection on the company's risk management policies.
In this video interview with Fool.com managing editor Brian Richards, Eddy Elfenbein, author of the influential Crossing Wall Street blog, says about Aflac CEO Dan Amos:
"I remember when there was the terrible earthquake and tsunami in Japan, and so much of their business is based there and so they were on television asking him about this, and he said, 'No, we're ready. This is what we do. We're prepared for this and we're going to be fine,' and that means so much."
When looking at the numbers, Aflac comes ahead of competitors like Genworth (NYSE: GNW), MetLife (NYSE: MET) and Prudential (NYSE: PRU). It has the highest dividend yield in the group, and also much higher profitability levels in terms of Return on Assets, Return on Equity and Operating Margin.
Financial figures are simply a consequence of the company's strategic direction and innovative policies, but it's comforting to see an investment thesis reinforced by the cold hard numbers.
acardenal has no positions in the stocks mentioned above. The Motley Fool owns shares of Aflac. Motley Fool newsletter services recommend Aflac. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.
