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For small business owners, every penny counts -- but so does every perk.




 

The American Family Life Assurance Company (AFLAC) (NYSE: AFL) sells medical and life insurance in the United States and Japan. 73% of the company's revenue comes from its Japanese segment, while the remaining 27% 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). On concern about AFLAC's portfolio exposure, the company's stock fell more than 30% in mid January, 2009. This was partially in response to losses in AFLAC's investment portfolio.

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. 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.[2]

AFLAC has made the Standard & Poors Dividend Aristocrat list for 2009, and was one of 52 companies. 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.[3]

Company Overview

Business Financials

Since 2001, AFLAC has had steadily increasing revenues. In 2009, its total revenues were $18.3 billion, compared to 2008's revenues of $ 16.6 billion. While its net income has remained positive, it has not had the same consistent and steady growth that AFLAC's revenues have had. In 2009, AFLAC's net income was $1.5 billion, compared to its net income of $1.25 billion in 2008.

Business Segments

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.[2]

AFLAC Japan (73% of 2009 revenue)[1]

AFLAC Japan 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.

  1. Medical Policies 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. AFLAC has also added different insurance packages to continually target different population segments.
  2. Cancer Life 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.
  3. Ordinary Life 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.
  4. Rider MAX 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 (27% of 2009 revenue)[1]

AFLAC US provides insurance that supplements primary medical coverage already has from their job or other provider.

  1. Accident/Disability Coverage 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.
  2. Cancer Expense Insurance 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.
  3. Hospital Indemnity Products AFLAC's Hospital Indemnity Insurance provides a benefit to a policy holder who is hospitalized as a result of an accident of sickness.
  4. Fixed-Benefit Dental Coverage AFLAC offers benefits to help cover the expense of dental check-ups, cleanings, and some dental procedures.

Key Trends and Forces

Exchange Rates

73% 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.

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.[4]

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.

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 $58,798[5] $27,895[6]
Premiums Ceded (millions of US$) $2,884 $11,731[7] $2,454[8]
Investment Income (millions of US$) $2,333 $28,619[9] -$738[6]
Combined Ratio 83.8% 90.3%[10] 86.3%[11]

References

  1. 1.0 1.1 1.2 1.3 AFL 10-K 2009 Item 1 Pg. 1
  2. 2.0 2.1 AFL Q3 2008 Quarterly Report, page 2
  3. Standard and Poors 2009 Dividend Aristocrats
  4. AFL 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page II-28
  5. AIG 2007 10-K, Item 1: Business, page 4
  6. 6.0 6.1 MET 2007 10-K, Item 6: Selected Financial Data, page 53
  7. AIG 2007 10-K, Notes to Consolidated Financial Statements, page 158
  8. MET 2007 10-K, Notes to Consolidated Financial Statements, page F-65
  9. AIG 2007 10-K, Item 6: Selected Financial Data, page 28
  10. AIG 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page 42
  11. MET 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page 76
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