The nice thing about being in the life/accident and health insurance business? For the most part, you know what you're getting into when you write a policy.
That's different from catastrophe insurers like Hidden Gems and Stock Advisor pick Montpelier Re (NYSE: MRH ) or RenaissanceRe (NYSE: RNR ) . You have to watch the Weather Channel constantly, for fear that a hurricane might wreck your bottom line.
So when Stock Advisor recommendation Aflac (NYSE: AFL ) reported that revenue for its fourth quarter increased 9% to $4 billion, and operating earnings increased 16% to $382 million, it wasn't a shock. In fact, management noted during the earnings call that 2007 was the eighteenth consecutive year in which Aflac increased operating earnings per diluted share by more than 15% (ignoring currency fluctuations).
It's the duck
What's Aflac's secret sauce of success? First, it helps to be in the right business. For example, when people die, life insurers write the deceased's beneficiaries a large check. Over a large sample population, mortality rates are remarkably consistent, which really helps insurers report steady growth.
Over the past five years, Aflac's benefits ratio (the amount paid by Aflac in claims and benefits to policyholders divided by premiums) varied from a high of 76.7% to 73.2%, exhibiting remarkable consistency. In comparison, a catastrophe insurer's ratio of losses to premiums might vary from 25% to 200%, depending on whether hurricanes hit a major metropolitan area or not.
It also helps to be big. Aflac is the largest writer of individually issued policies marketed at worksites, and it derives the majority of its income in Japan, where Aflac's cancer insurance products are extremely prevalent. Aflac's size also allows it to do things like heavily advertise its infamous duck commercials. After all, who would you rather buy life or disability insurance from, a company like Aflac, Prudential (NYSE: PRU ) , MetLife (NYSE: MET ) , or AIG (NYSE: AIG ) , or NoName Life Insurer?
Another interesting point during Aflac's earnings call was that Aflac could be late to the game and still win. Management pointed out that it wasn't the first to market cancer insurance, medical insurance, or its new Gentle EVER non-standard medical insurance product. But once it entered the market and used its distributional might, it became the No. 1 seller of each product in its markets.
Attack of the clones
This allows Aflac to be cautious, sit back, and let others do the work in formulating new products; the company still comes out on top when it's clear which products succeed. Management also seems to be doing a good, conservative job managing its investments, since only 1.9% of them were rated below investment grade, and none have direct subprime exposure.
All in all, Aflac has a remarkably steady business with ample growth prospects. Its share price reflects that steadiness, so although it's not a screaming bargain, anyone owning Aflac can be pretty confident in what they're buying.
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