Aflac Holds Leadership In Japan; Interest, Currency Hurts

On Jul 5, 2016, we issued an updated research report on Aflac Inc. (NYSE:AFL) . The company holds a leading position as a provider of innovative and value-added supplemental worksite benefits. About 75% of the company's profits come from Japan, where the company is among the largest insurers. In Japan, it has tie-ups with Dai-ichi Life, Banks, Japan Post Group, and Daido Life for selling its products.

In its Life insurance segment, the company maintains a diversified business mix with no single product constituting more than 23% of sales and 73% of sales having no long-term guarantees. This protects the company from long-term claims. This strategy by the company is viewed favorably by the investors.

Aflac’s retirement plan business is well positioned for future growth. The company has aligned itself with faster growth markets such as Small and Mid Corporate 401 (k), Mid-Large Government 457 and Mid-Large Healthcare 403(b), which bode well for the segment’s long-term growth.

Investors also view favorably its Annuities business, from which it derives high quality income stream. The company continues to tilt VA sales toward products without guaranteed living benefits.

Aflac has also been able to maintain strong capital levels with a debt-to-capital ratio of approximately 22% as of Mar 31, 2016, and interest coverage in excess of 14 times. Consistent capital generation has also enabled it to buy back shares and institute an increase in dividend at regular intervals which has boosted shareholder’s wealth and their confidence in the company.

Aflac carries superior ratings reflective of its ability to pay claims. Its financial strength ratings, are rated A+ by A.M. Best, Aa3 by Moody’s, A+ by S&P and AA- by Rating & Investment Information Inc.

Nevertheless, Aflac's earnings remain challenged by the low interest rate environment that continues to hinder sales growth in Japan and the U.S. markets. Also, the impact of currency volatility on consolidated results might have affected the company.

Aflac presently carries a Zacks Rank #3 (Hold). Some better-ranked stocks from the insurance space are Amerisafe, Inc. (NASDAQ:AMSF) , Universal American Corp (NYSE:UAM) and Sun Life Financial Inc. (TO:SLF) . While Amerisafe sports a Zacks Rank #1 (Strong Buy), the other two stocks carry a Zacks Rank #2 (Buy).