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The American Family Life Assurance Company (AFLAC) (NYSE: AFL) sells medical and life insurance. 71% of the company's revenue comes from its Japanese segment, while the remaining 29% comes from its American operations.[1] In both segments, AFLAC focuses on offering supplemental coverage to people who may already have insurance from their employer or their government. AFLAC also offers customizable cancer insurance packages and different 'rider' policies that can be attached to an individual's insurance policy as a supplement for more specified coverage.
The investment portfolio of an insurance company is as important as ever in light of the crisis at the largest life insurer by market share, American International Group (AIG).[2] AFLAC reported a $389 million loss on its investments in the third quarter of 2008.[3] On concern about AFLAC's portfolio exposure, the company's stock fell more than 30% in mid January, 2009.[4]
Since almost three-quarters of AFLAC's revenue comes from Japan, the company's reported earnings in the US are subject to changes in the Yen/Dollar exchange rate. 2008 was a strong year for the Yen, appreciating 25% percent compared to a basket of other currencies.[5] Increases in the Yen/Dollar exchange rate translate into higher reported earnings in the US. However, the management of AFLAC claim that they rarely actually exchange any of their own assets, meaning that changes in the exchange rate do not effect their real performance.[6]
AFLAC has made the Standard & Poors Dividend Aristocrat list for 2009. Members of this list are companies on the S&P 500 (.SPX-E) that have raised their dividend every year for at least 25 years in a row.[7] 52 companies made this list.
[edit] Company Overview
[edit] Business Financials
AFLAC operates two main divisions: AFLAC Japan and AFLAC US. This means that earnings are calculated with a currency translation adjustment from Japanese Yen to US Dollars. However, AFLAC notes that they rarely actually convert assets between Yen and Dollars, so any exchange rate fluctuations do not materially affect the operations of the company.[6]
AFLAC reported realized loss on investments of $389 million from its investments in financial companies, such as Lehman Brothers (LEH), and its hybrid securities, which are a mix of debt and equity.[3] The market has indicated concern about AFLAC's investment portfolio, dropping more than 30% in mid January, 2008, due to concerns about the exposure of the company's portfolio.[11] AFLAC's CEO Daniel Amos stated that despite these losses, the company had no need to raise additional capital.[12] Despite this loss, the company earned a $100 million for the third quarter of 2008.[3]
[edit] Business Segments
AFLAC operates two different segments: AFLAC U.S. and AFLAC Japan.
- AFLAC Japan (71% of revenue,[1] 72% of pretax earnings[13]) provides insurance that supplements Japan's national health insurance coverage. Management claims that consumers are shifting from dependency on the national health care system to private insurance.[14]
- Medical Policies (33% of Japanese Sales)[9] AFLAC Japan offers different custom health insurance packages through its EVER medical insurance products. The EVER products insure against hospitalization expenses. EVER includes products targeted to specific types of the population, such as EVER Paid Up, a policy charging higher premiums earlier in life to guarantee lower premiums or no premiums when they are older.[14] AFLAC has also added different insurance packages to continually target different population segments. In August 2007, AFLAC introduced Gentle EVER, an insurance product targeted to individuals with existing health conditions that would have difficulty qualifying for the other EVER insurance products.[14]
- Cancer Life (33% of Japanese Sales)[9] AFLAC Japan also offers cancer life insurance plans. These insurance plans cover hospitalization, outpatient, and extensive care expenses associated with a diagnosis and treatment of cancer. AFLAC offers some programs, such as its Rider MAX insurance against sickness and accidents, to be attached to its cancer life insurance policies.[15] As of December, 2007, AFLAC Japan has 14 million Cancer Life insurance policies outstanding.[16]
- Ordinary Life (22% of Japanese Sales)[9] AFLAC's ordinary Life Insurance policies offer similar flexibility to AFLAC's other products. Some of these options include attaching the policy as a rider to one of AFLAC's other products. In addition, the Ordinary Life insurance products can be converted into other types of coverage such as medical coverage.
- Rider MAX (7% of Japanese Sales)[9] AFLAC Japan's Rider MAX policies are supplemental coverage policies that are offered to individuals already under Life Insurance coverage from one of AFLAC's other insurance products.
- AFLAC US (29% of revenue,[1] 28% of pretax earnings[13]) provides insurance that supplements primary medical coverage already has from their job or other provider.
- Accident/Disability Coverage (51% of US sales)[10] AFLAC's Accident and Disability coverage insures the policy holder against accidents and injuries. It also insures against accidental deaths. AFLAC has made this policy customizable by offering additional insurance to the policy holders that insure against disabilities.
- Cancer Expense Insurance (18% of US sales)[10] AFLAC's Cancer Expense Insurance offers many coverage for many different stages of cancer diagnosis and treatment. Typically, a policy holder receives a benefit if diagnosed with cancer and indemnity to cover hospitalization and treatment expenses. AFLAC has also made this plan customizable by its new coverage called Maximum DifferenceSM, which offers coverage for cancer prevention expenses and tailors to individuals' different medical and financial needs.[15]
- Hospital Indemnity Products (14% of US sales)[10] AFLAC's Hospital Indemnity Insurance provides a benefit to a policy holder who is hospitalized as a result of an accident of sickness.
- Fixed-Benefit Dental Coverage (6% of US sales)[10] AFLAC offers benefits to help cover the expense of dental check-ups, cleanings, and some dental procedures.
| Operating Metrics | 2005 | 2006 | 2007 |
| Revenue from Premiums (millions of US$) | $11,990[17] | $12,314[17] | $12,973[17] |
| Premiums Ceded (millions of US$) | $2,263[18] | $2,515[18] | $2,884[18] |
| Investment Income (millions of US$) | $2,071[17] | $2,171[17] | $2,333[17] |
| Combined Ratio | 84.5%[19] | 84.5%[19] | 83.8%[19] |
- Revenue from Premiums measures the total amount of revenue that is earned from premiums on insurance policies. This measure has grown over the past three past three years, which AFLAC claims is due to growth in the number of policies issued both in Japan and in the US.[20][21]
- Premiums Ceded measures how much of AFLAC's revenue from insurance premiums is paid to other reinsurance companies in exchange for transferring the risk of the policies to the other insurance company.
- Investment Income measures the return on the company's investments. This is important because the revenue from premiums on insurance premiums is invested in order to cover future benefit payments.
- Combined Ratio measures the benefits and expenses from both acquiring and paying claims on AFLAC's policies divided by operating revenues. A Combined Ratio of less than 100% indicates that the company is earning more from its policies than it is losing. The lower the ratio, the better.
[edit] Key Trends and Forces
[edit] Market Conditions for Investments
In addition to AFLAC's portfolio of debt, the company invests in equity of many other companies. This exposes the assets that back all of the company's insurance policies to market risk. In the third quarter of 2008, AFLAC realized a $389 million loss on its investments in companies such as Lehman Brothers (LEH).[3]
[edit] Exchange Rates
71% of AFLAC's revenue comes from Japan.[1] This means that all of AFLAC Japan's earnings are translated into dollars for financial reporting. An increase in the exchange rate increases AFLAC's reported revenues. The following chart shows the USD/JPY exchange rates.
[edit] Interest Rates
AFLAC's investment portfolio is subject to risk from fluctuations in Interest Rates. In particular, AFLAC's bonds decrease in value with an increase in interest rates. According to AFLAC, an increase in interest rates of 1% decreases the fair value of the company's debt holdings from $54.7 billion to $48.9 billion.[22]
[edit] Medical Treatment and Technology
The field of medicine changes fast. New technologies and treatment techniques are always being developed, and AFLAC address this by constantly updating its policies and tailoring them to new medical expenses. For example, AFLAC's many rider policies allow individuals with outstanding insurance policies to purchase additional insurance against costs associated with new treatments.
[edit] Competition
There are many insurance companies with which AFLAC competes in its different markets and insurance products. Three of the largest are:
- American International Group (AIG) offers many different insurance products through its subsidiaries. It operates in many different countries and offers General Insurance, Life Insurance, and financial services. AFLAC mainly competes with AIG's Life Insurance products, because AIG offers many other lines of insurance and operates in regions where AFLAC does not operate.
- MetLife (MET) is an insurance company operating in the US, Latin America, Asia, and Europe. MetLife offers life insurance, annuities, automobile and homeowners insurance, reinsurance, group insurance products, and some financial services. MetLife's life insurance competes directly with AFLAC's life insurance products.
- Prudential Financial (PRU) is one of the top life insurance providers in the country. Prudential operates in the US, Latin America, and Asia. Both AFLAC US and AFLAC Japan compete with Prudential.
| Competition | AFLAC | American International Group (AIG) | MetLife (MET) |
| Revenue from Premiums (millions of US$) | $12,973[17] | $58,798[23] | $27,895[24] |
| Premiums Ceded (millions of US$) | $2,884[18] | $11,731[25] | $2,454[26] |
| Investment Income (millions of US$) | $2,333[17] | $28,619[27] | -$738[24] |
| Combined Ratio | 83.8%[19] | 90.3%[28] | 86.3%[29] |
[edit] References
- ↑ 1.0 1.1 1.2 1.3 1.4 AFL 2007 10-K, Item 1: Business, page I-1
- ↑ 3.0 3.1 3.2 3.3 AFL Q3 2008 Quarterly Report, page 1
- ↑ Seeking Alpha Thursday Options Update, 1/22/09
- ↑ Seeking Alpha Japanese Yen: An Excessively Strong Currency Spells Recession, 12/28/2008
- ↑ 6.0 6.1 AFL Q3 2008 Quarterly Report, page 2
- ↑ Standard and Poors 2009 Dividend Aristocrats
- ↑ AFL 2007 10-K, Item 6: Selected Financial Data, page II-4
- ↑ 9.0 9.1 9.2 9.3 9.4 AFL 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page II-19
- ↑ 10.0 10.1 10.2 10.3 10.4 AFL 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page II-24
- ↑ Morningstar: Aflac slumps on concern about investment exposures, 1/22/2009
- ↑ Reuters: Aflac shares plummet to lowest level since 2000, 1/26/2009
- ↑ 13.0 13.1 AFL 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page II-62
- ↑ 14.0 14.1 14.2 AFL 2007 10-K, Item 1: Business, page I-3
- ↑ 15.0 15.1 AFL 2007 10-K, Item 1: Business, page I-4
- ↑ AFL 2007 10-K, Item 1: Business, page I-8
- ↑ 17.0 17.1 17.2 17.3 17.4 17.5 17.6 17.7 AFL 2007 10-K, Schedule III Supplementary Insurance Information, page IV-12
- ↑ 18.0 18.1 18.2 18.3 AFL 2007 10-K, Schedule III Supplementary Insurance Information, page IV-13
- ↑ 19.0 19.1 19.2 19.3 AFL 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page II-47
- ↑ AFL 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page II-17
- ↑ AFL 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page II-23
- ↑ AFL 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page II-28
- ↑ AIG 2007 10-K, Item 1: Business, page 4
- ↑ 24.0 24.1 MET 2007 10-K, Item 6: Selected Financial Data, page 53
- ↑ AIG 2007 10-K, Notes to Consolidated Financial Statements, page 158
- ↑ MET 2007 10-K, Notes to Consolidated Financial Statements, page F-65
- ↑ AIG 2007 10-K, Item 6: Selected Financial Data, page 28
- ↑ AIG 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page 42
- ↑ MET 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page 76
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