3 Important Takeaways From Aflac's 2nd Quarter

Aflac Incorporated (NYSE: AFL) has been selling third-sector insurance policies, plans covering illnesses and injuries, since the 1950s. These days, it is probably best known for its loveable spokesperson, that seemingly ubiquitous Aflac duck. Over the past year, the company's stock has nearly matched the S&P 500 index blow for blow, with appreciation between the two within a single percentage point over the time period.

When the company reported its second-quarter earnings last month, the numbers appeared decent for a stock price firmly rooted in value territory . Total revenues grew to $5.6 billion, a 3% increase year over year, while adjusted earnings per share (EPS) jumped to $1.07, a 20.2% increase year over year.

After reviewing the company's second-quarter conference call, transcribed by S&P Global Market Intelligence , I believe there are three noteworthy takeaways for investors from the quarter. Let's take a closer look at each.

Man with broken leg in cast sitting on couch talking on phone.

Aflac sells third-sector insurance policies, which cover things such as injuries and illnesses. Image source: Getty Images.

New cancer policies are popular in Japan

One thing casual investors might not know about Aflac is that most of its sales, usually in the neighborhood of two-thirds, are actually generated in Japan, not the U.S. This quarter, total revenues for Aflac Japan amounted to $3.8 billion, or about 67% of the company's total. In the company's first quarter , CEO Daniel Amos stated the delayed launch of new cancer insurance plans led to challenges.

This quarter, with the launch of the new plans acting as a tailwind, sales in third-sector insurance products soared. (Third-sector insurance policies refer to insurance products for things such as sickness, injuries, and hospital stays. First sector is life insurance; second sector is for property.) In the conference call, Amos said:

Aflac Japan's outstanding third sector sales increase of 16% was well above our expectations. The strong results was largely due to April's introduction of our new cancer insurance product. ... First, the new cancer insurance policy offered popular enhanced benefit features, while carefully managing the risk profiles of the product as we've done in the past. In addition, we launched a targeted promotional campaign for all this cancers -- the new cancer product that incorporated television ads with the largest direct mail campaign we have ever done. And finally, we fully engaged our wide-reaching distribution network.

Amos also credited a large distribution network provided through a key partnership with Japan Post for driving sales.

Quackin' the code for profitability

One of the best ways to measure the profitability of an insurer is by looking at its combined ratio , the sum of claim-related losses and business expenses divided by its earned premiums. This formula measures an insurer's profitability before the investment gain it earns on its float is taken into consideration.

For Aflac, all applicable figures can be found on its latest 10-Q filing with the SEC. For the numerator, go to page three and add Aflac's "Benefits and claims, net" with "Total acquisition and operating expenses." The denominator can be found by adding Aflac Japan's and Aflac U.S.'s net earned premiums from page 16 of the 10-Q. This looks like:

(3,031 + 1,427)/(3,227 + 1,426) = 0.96

As a good rule of thumb, I look for a ratio under 1.0, indicating the insurance company is profitable from its policy underwriting before its investment income is taken into account. I have been a shareholder for Aflac for quite a while and calculate this formula almost every single quarter and have never found it to be above 1.0.

A shareholder-friendly management team

Aflac's management continues a shareholder-friendly approach. In Q2, Aflac repurchased about $306 million worth of shares and maintained its target of $1.1 to $1.4 billion of buybacks for the full calendar year.

Headed into the 2017 fourth quarter, Aflac raised its dividend 4.7%, marking the 35th consecutive year Aflac had hiked its payout to shareholders. The streak easily places Aflac among the elite group of Dividend Aristocrats , companies in the S&P 500 index that have raised their dividend for the past 25 consecutive years. In the first quarter, Aflac then raised its dividend again, this time by 15.6%, citing tax reform as the reason for the hike. The $0.26 quarterly dividend gives the stock a decent 2.23% yield while sporting a low payout ratio under 30%.

Final thoughts

Aflac remains a company performing well and selling at a discount to the vast majority of the market. Based on the midpoint of its full-year 2018 guidance, Aflac sports a P/E ratio of just 11.7. While it will never be mistaken for a sexy tech stock, sometimes slow and steady does win the race. Maybe the tortoise -- scratch that -- the duck can beat the hare. Aflac offers investors an undervalued stock with a management team willing to reward investors with consistent dividend hikes and share buybacks. All in all, Aflac is a company that value investors might want to reserve a place for in their portfolios.

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Matthew Cochrane owns shares of Aflac. The Motley Fool recommends Aflac. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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