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Aflac: "Ducking" the Bear
06/10/2005 12:00 am EST
"Risks are definitely rising, and we might be in the 8th or 9th inning of the ball game," notesJames Stack and Bruce Morton in InvesTech Market Analyst. "Our latest featured stock, with unique advantages to thrive in a mature bull market, is an opportunity to ‘duck the bear’ ."
"AFLAC (AFL NYSE) provides supplemental health and life insurance in Japan and the US. In 1974, the company became the first American insurer to be granted a Japanese license in 30 years. AFLAC took advantage of this barrier to entry to build a commanding market share presence. Its insurance products are sold primarily at worksites through independent agents, with premiums paid by the employee. The company currently dominates the Japanese market, with one-quarter of citizens owning an AFLAC policy. Japanese operations accounted for roughly 75% of revenues and profits in 2004.
"Japan’s demographics alone are illuminating. In the last eight years, co-payments on Japan’s national healthcare system have increased from 10% to 30%. This steady shift of healthcare costs to consumers has increased the need for AFLAC’s products. And with an aging population, it is likely that Japan’s national healthcare system will continue to experience financial stress, driving more of the burden to the consumer. The number of people of working age (15 to 64) has been shrinking since 1995. By 2050, the working population is expected to dwindle to just 54 million from its peak of 87 million. At the same time, the number of people 65 and older will rise from one-fifth to one-third of the population.
"The company’s US operation sells cancer plans (20% of total sales in 2004) and various types of health insurance, including accident and disability, dental, and hospital indemnity. With only a 7% share of the US market, but with a name awareness of around 90% and a sales force that has been significantly increased, the company has ample opportunity to grow domestically over the long term. As employers and workers cope with continually rising healthcare costs, they will look to supplemental insurance as a solution. The attractive demographics of AFLAC’s primary markets, its low-cost operating structure, and solid financial position create a competitive advantage that should translate into above average profitability and earnings growth.
"While its stock price has hardly burned up the track in 2005, its performance is well ahead of the S&P 500 and the company’s business profile offers some unique advantages as well. Its savvy marketing program, featuring the ubiquitous duck, gives AFLAC’s independent agents a huge leg up in sales potential and vastly reduces customer acquisition expenses. This, combined with the industry-leading client retention rate of above 90% and a commanding market share, produces an industry-low operating cost structure. This has allowed AFLAC to pay more attractive agent commissions than its competitors.
"Higher rates will boost investment income and the company’s substantial foreign exposure should help mitigate the financially harmful effects of any renewed weakness in the US dollar. Not many life insurance companies can consistently generate returns on equity (ROE) of 15%-20%. AFLAC delivered an annualized ROE of almost 17% in 2004, in addition to raising its dividend for 22consecutive years. Earnings per share have risen 17% annually for the past ten years. While we have been decreasing our exposure to the financial sector as the Fed has been ratcheting up short-term rates, we believe the life insurance segment, in general, and AFLAC in particular, will perform well, as its competitive advantages enable the company to continue to deliver superior growth and profits going forward."
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