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A Stock You Can Take Home to Mother

Peter is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Aflac is a niche-product insurer that sells supplemental health and life insurance in the US and Japan. Supplemental accident insurance dominates its US market, where Colonial Life, a subsidiary of the UNUM Group (NYSE: UNM), provides its strongest competition. Supplemental cancer insurance dominates Japanese sales. Investors interested in other US insurers with a strong presence in the lucrative Japanese insurance market should also take a close look at both MetLife (NYSE: MET) and Prudential (NYSE: PRU). Both got a boost by buying Japanese subsidiaries of AIG as that monster unwound assets. MetLife’s Japanese Alico division competes directly, selling supplemental health policies. Prudential is less of a direct competitor with its focus on traditional life and annuities, but sits atop the pile as Japan’s largest foreign life insurer. Aflac’s a conservative, well-run company that’s shareholder friendly. While this is a company you can safely take home to meet your mother, Aflac does face some challenges.

When search of great, long-term investments, The Motley Fool favors an analysis method tagged with the acronym ‘SWOT.’ The aim is to find the few key elements driving a stock, focusing sequentially on a company’s Strengths, Weaknesses, Opportunities and Threats. Let’s take a look at Aflac (NYSE: AFL).


  • Shareholder friendly. Despite the recession, this Dividend Aristocrat’s raised its dividend every year for the past 29 years. Aflac’s ‘widows-and-orphans’ reputation is deserved.
  • Leader in Supplemental Insurance. Everyone’s familiar with the Duck and its message. In the US, Aflac sells supplemental insurance primarily to individuals, avoiding the more crowded group disability market. This niche focus allowed Aflac to carve out a leadership position and create a recognizable brand. In Japan, Aflac leveraged its low cost advantage over peers to ride its way to the top of the life insurance market.
  • Presence in Japan. Japan’s a great insurance market. Aflac leads the large and growing Japanese Life Insurance market with over 21 million policies in force (others are larger in terms of assets managed). Industry solvency is Job #1 for Japanese regulators, and price controls are a fact of life. Yet that rigid control has benefits, by limiting entry and protecting industry margins. Rates structured to make all providers profitable, mean wider margins for low-cost providers like Aflac.


  • US softness. Aflac’s sales model focuses on small business. Stalled small business job creation has hurt in the US, flattening Aflac’s growth.
  • Low yield environment, especially in Japan. The exceptionally low yield of the Japanese bond market provides a challenge to all Japanese insurers. The search for yield led to some missteps in the past as Aflac over-concentrated in European financial securities. Rebalancing of the portfolio remains an ongoing task as Aflac expands purchases into the US corporate market. Effective hedging of these new dollar-denominated bond positions will be critical.
  • European investment challenges. Despite progress in rebalancing its investment portfolio, Aflac still has a great deal of European exposure. Even though better prepared this time around, Aflac will surely be hurt again if Europe worsens.
  • Currency exchange issues. Aflac Japan books three quarters of Aflac’s operating revenue. Yen to dollar swings mean lumpiness that can be judged harshly by the market at times. Long term investors can take advantage of these moments by ignoring the lumps and focusing on constant-currency results.
  • Profit taking. Shares ran up well in the last six months and are near a 12-month high. Uncertainty surrounding the fiscal cliff and capital gains rates could lead to short term profit taking if the fiscal crisis isn’t favorably resolved.


  • Expansion of their Japanese bank sales channel. Aflac’s benefiting from recently liberalized banking rules allowing banks to sell life insurance in Japan. The bank channel’s WAYS product led to Aflac Japan’s recent above-guidance growth. Ultimately, Aflac Japan hopes to cross sell other products to new customers initiated to the brand by WAYS. Look for progress in widening that bank channel.
  • Group insurance in the US. Aflac emphasizes direct sale to individuals in the workplace. Recognizing a need to compete in the group disability market, Aflac bought Continental American Insurance Company, a group insurer in 2009. The going has been slow, but the group disability market provides a great deal of growth potential if they can establish a foothold.
  • Fixing its yield problem. Aflac suffered investment losses throughout the recession forcing a run to quality in ultra-low yield JGBs. Ongoing adjustments will improve that yield in the future. Aflac’s underwriting is consistently profitable, so none of that yield is required for benefits. It goes straight into the piggy-bank. Fixing the weak yield means more coin for piggy.
  • Share repurchase opportunity. Past investment losses curtailed repurchases, cramping growth. With shares reasonably priced and buy-backs back on, sharecount will resume its downtrend, helping EPS growth in 2013 and beyond. Repurchases should also help stabilize shares as we teeter on the fiscal cliff.


  • A double dip. It’s obvious, but needs to be said. A double dip in the US and continued softness in small business creation will pressure Aflac US.
  • Anything bad in Japan. Every event that affects Japan adversely, leads to selling of AFL shares. With its massive JGB exposure, financial uncertainty for Japan means financial uncertainty for Aflac.
  • WAYS repricing issues. Aflac Japan recently applied to reprice a segment of its WAYS products and cut back on some of the purchase incentives that were denting the high-momentum product’s margins. How that affects sales bears watching.
  • Changes in competition as a result of Japanese Post Office reform. The Japanese Post Office sells life insurance, including Aflac cancer policies, in its branches. The Post’s Kampo unit is a huge player in the insurance market. With postal reorganization ongoing, any direct foray of Kampo into supplemental health or change in Kampo’s relationship with Aflac would be costly.

Do you have different views on Aflac? We’d like to hear them in the comments sections below.

JustMee01 owns shares of Aflac. The Motley Fool has no positions in the stocks mentioned above. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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