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Summary of Operations
Aflac is an insurance business. Its mainly consists of two subsidiaries: Aflac Japan and Aflac U.S. While founded and headquartered in Georgia, the company successfully expanded across Japan over the last two decades. It currently controls about 20% of the Japanese insurance market, enjoying strong brand recognition and lacking any major competitors. Technologically advanced, culturally homogenous, and driven by a strong work ethic, the people of Japan provide a stable engine of cash to Aflac and its shareholders. Japanese operations accounted for 68% of revenues and 83% of assets in 2020.
Most income is from insurance premiums and fixed-maturity investments. Expenses mostly come from policy claims and establishing reserves for such purposes but also include commissions on sales and general business expenses. Sales of products are done primarily through individual representatives with customers.
Aflac is consistently profitable and has successfully paid and increased its annual dividend for thirty-eight straight years.
Strategy
Aflac seeks to grow by leveraging its brand to form alliances with other insurance companies and thus expand into other product offerings. Some of these alliances involve partial acquisitions of the other business’s common stock, usually no more than 10%. Japan Post Holdings is on such example, as is Trupanion, Inc. (a pet insurance company). Entire acquisitions of smaller companies also occur, as was seen in November of 2020 with Zurich North America’s U.S. Corporate Life and Pensions.
Additionally, while Aflac’s portfolio primarily consists of fixed-maturity investments with government bonds (with the goal of maintaining liquidity and aligning that maturity with the timeline their policy claims), it may seek modest growth through the gains made on these investments.
Lastly, Aflac aims to make its sales team more accessible to customers by expanding its use of digital, remote sales, not only through COVID and but in an increasingly technological world.
Growth and Future
Aflac is a safe, stable company with a bright future ahead. At its size, significant growth can only occur if it can successfully channel cash generated from its Japanese operations to expand its position in the U.S. The power of its brand means that modest growth will occur, but even with modest growth, shareholders may still enjoy strong returns through its share repurchase program (over the last three years, buybacks have grown a shareholder’s position by 16%), the escalating dividend, and the returns on Aflac’s capital investments.
Aflac is a steady compounder, has virtually no downside, and is a great company.
Valuation
Growth Assumptions: 6%
Intrinsic Value Per Share: $52
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