This Duck's Japanese Moat May Spread to the States

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After digesting the government data concerning jobs, which was seen as a positive with June non-farm payrolls reported at 195,000 versus the consensus estimate of only 165,000, stocks rallied significantly. The Federal Reserve's plan to taper may be coming sooner than later-- especially if an increase in added jobs becomes a reoccurring and frequent thing. This will likely keep rates on the upward trend.

Insurers make a good bet going forward...

One industry that may benefit from higher rates is insurance. Higher rates means higher profits for the insurers, who can invest client premiums in assets such as bonds to support future payouts. The nation's largest life insurer is MetLife (NYSE: MET), followed by Prudential Financial, (NYSE: PRU)AFLAC (NYSE: AFL) is the largest provider of supplemental insurance in the United States.

Here's how these three companies stack up against each other:

<table> <thead> <tr><th> </th><th>P/E</th><th>Forward P/E</th><th>Price/Book</th><th>Dividend (Yield)</th></tr> </thead> <tbody> <tr> <td>AFL</td> <td>9.03</td> <td>8.78</td> <td>1.70</td> <td>1.40 (2.40%)</td> </tr> <tr> <td>MET</td> <td>22.11</td> <td>8.29</td> <td>0.79</td> <td>1.10 (2.40%)</td> </tr> <tr> <td>PRU</td> <td>52.54</td> <td>8.51</td> <td>0.86</td> <td>1.60 (2.20%)</td> </tr> </tbody> </table>

Data provided by Yahoo! Finance

The above insurance stocks trade at about par when considering their price relative to forward earnings and their dividend yields. All three company's share price suffered quite a bit as a result of the financial crisis as well.

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The financial crisis, however, clearly separates one of these three companies apart from the pack -- at least as far as earnings quality and overall business strength goes.

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Unlike MetLife and Prudential, if only earnings were considered, an investor in AFLAC would have barely even noticed that a financial crisis ever happened. AFLAC maintained profitability and its earnings are still on an uptrend in today's market.

It's dividends tell a similar story:

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AFLAC, unlike its fellow insurers, managed to not only continue to pay its dividend, but also managed to increase it -- just like they have been for over 30 years.

Is supplemental insurance where it's at?

With the Affordable Care Act (ACA), or "Obamacare", inevitably coming onto the scene sometime in the future, AFLAC may be insulated better than most. The companies policies, according to CEO Dan Amos in a letter to shareholders and customers, are not major medical insurance, and are therefore not negatively impacted by healthcare reform. Amos also points out the company's great success in Japan, a country which has had a national healthcare system for years. 

According to the company, AFLAC's policies provide insurance for "everyday living and out-of-pocket expenses associated with illness and injury" and the company is currently king of supplemental coverage in the U.S. and even more so in Japan. This lucrative market is becoming more and more attractive to other players such as MetLife and Prudential as well.

Both Prudential and MetLife are looking to compete with AFLAC by adding supplemental health policies to their array of services. This may be a way to avoid some of the negatives resulting from Obamacare, because apparently the new law limits profits from traditional medical insurance.  

The changing landscape...

AFLAC's CEO commented on the upcoming changes as a result of the ACA, stating that:

"The cost of major medical continues to go up at such a rapid rate...Employers are eventually going to say, 'Enough is enough.' "

Before further elaborating on the subject by saying that:

"...employers may cut back the scope of coverage they offer and increase deductibles and copays. The Aflac plans help cover gaps in less-costly plans or as deductibles and copays rise."

AFLAC has enjoyed incredible success in Japan, and they have the expertise to dominate in a similar fashion in a newly created U.S. national healthcare system. 

A Prudential VP, Vishal Jain, carries similar sentiment to AFLAC, explaining that:

"Employers continue to expect shifting further costs to employees... They're not expecting health care reform to reduce their health care cost trend." 

This is why Prudential is expanding into supplemental and voluntary insurance services. The company recently added a critical-illness policy last year, and is increasingly looking for new ways to maintain profits and adapt to the upcoming shift in the healthcare landscape that will be caused by the ACA. The company estimated that only around 20% to 30% of employers offer accident or critical-illness coverage, which means lots of potential market share for it to gobble up.

MetLife began adding supplemental insurance products this year as well, recently offering group accident insurance to help both employers and employees address the concern of rising healthcare costs. MetLife's senior Vice President Michael Fradkin explained that:

“Healthcare trends and changes, including the Patient Protection and Affordable Care Act, are leading many employers to take a fresh look at their benefits program, including where voluntary products like accident insurance can play a role... Accident insurance pays employees directly and the funds can be used in any way they want, so they can focus on recovery rather than financial concerns.” 

MetLife is looking to remain competitive with Prudential and AFLAC in the shifting landscape being brought upon the U.S. by the ACA. Their new product will not only help employees narrow the financial gap in medical insurance, but also allow employers to control benefit costs.

The bottom line

While MetLife and Prudential will most likely benefit from rising rates, when concerning the issue of them moving into the AFLAC duck's natural habitat of supplemental and voluntary insurance policies they are late to the game. AFLAC has already proven that it can thrive by being the cheapest and best insurance provider in a national healthcare system in Japan, and this can be demonstrated by the fact that almost 90% of all companies listed on the Tokyo exchange offer AFLAC products.

This may mean great things for the company if they can develop the same success in the U.S. as in Japan, especially if they can manage to not only get a boost in profits from the ACA in the long-term, but also from rising rates in the short to medium-term.

While the devaluing of the yen is definitely a major concern for AFLAC going forward, Obamacare can help offset these worries as a catalyst for further growth in the United States. The company doesn't directly exchange yen for dollars either, so the currency problem may be overblown.

AFLAC is a great business that remained profitable and increased its dividend in one of the worst financial crises in recent memory, and it will likely continue to do so going forward as well. AFLAC is a great buy for an investor looking to invest in an insurance play, especially in the times of Obamacare, but keeping an eye on what happens in Japan would be wise.

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Joseph Harry owns shares of Aflac. The Motley Fool recommends 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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