Aflac Rides on Strong U.S. Business and Solid Balance Sheet
Aflac, Inc. AFL has given a consistently favorable operating performance backed by its industry-leading market share, and scale in Japan and the United States. Its recognized and powerful brand, diverse and productive distribution network, product innovation, customized high-quality service, and a strong capital position owing to stable earnings and strong cash flows also augur well.
The company’s superior operating profitability is underscored by the fact that it surpassed earnings estimates in 14 out of the last 15 reported quarters.
Last year, Aflac successfully changed its Japan business from a branch to a subsidiary. Japan has been a significant business generator for the company. This change in operating structure aligns Aflac better with the global regulatory framework.
The company recently entered into an agreement with Japan Post per which the latter will buy 7% of Aflac’s shareholding. This agreement will drive business expansion in the region, thus aiding overall growth.
The company has suffered from low interest rates in Japan and has changed the product mix to emphasize sale of third-sector products, which are less prone to interest rate volatility.
Aflac anticipates that in its Japan business, total earned premium of third-sector and first-sector protection products combined will slightly decline due to limited pay policies reaching paid-up status. Though sales are also expected to decline in low to mid-single digits for 2019, the long-term picture remains bright.
Recently, Japan Post was caught in compliance issue on allegations of agent misconduct (relating to double charging its customers). This might cause Japan Post to lower sales target per agent and improve sales practices. Thus, initiatives to be taken to rectify the glitch might dampen sales for 2019.
In its U.S business, the company continues to put up a good show, with constant growth in premiums over the years. Aflac has undertaken a number of growth initiatives in this segment such as the adoption of Everwell and One Pay Day for increased penetration, delivery of value-added services and increased client retention, product partnering to drive improved account values and employee access and investment in administrative capabilities.
Per the company, investments made in distribution and customer experience will promote increased productivity, persistency, and improved long-term economics. In 2019, the company expects improvement in sales and 2-3% growth in earned premium.
Recently, Aflac announced to acquire Argus Dental & Vision. Argus is a provider of turnkey administrative services supporting Medicare Advantage and Medicaid Network Dental and Vision products on behalf of large health care providers. This is a very important move for Aflac U.S. and it provides a platform to build Aflac’s network dental and vision products.
Aflac’s strong risk-adjusted capital position is another positive. The company has raised dividends for 36 consecutive years. The stock is known as dividend aristocrat and is viewed attractively by dividend seeking investors.
Year to date, the stock has gained 15.6% compared with the industry's growth of 11.3%.
Aflac carries a Zacks Rank #2 (Buy).
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