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3 Bullish Takeaways From Aflac's Latest Quarter

Matthew Cochrane, The Motley Fool

Aflac Inc (NYSE: AFL) is clearly not the most exciting stock in today's bull market. The supplemental-insurance provider certainly doesn't share the gaudy year-to-date return numbers of some big technology companies that have dominated business headlines recently, but that doesn't mean it hasn't been rewarding to be an Aflac shareholder. The company's stock has returned 20.4% year to date, noticeably better than the S&P 500's return of 15.7%.

When the company recently reported its third-quarter earnings, the numbers didn't reveal too many surprises. Total revenue slumped to $5.5 billion, a 3.7% decrease year over year. Operating earnings, the metric Aflac's management uses to evaluate the financial performance of the company's insurance operations, decreased 5.2% to $676 million. To be fair, however, a good portion of these decreases were driven by the weakness in the yen; a significant piece of Aflac's earnings are denominated in the currency due to its huge presence in Japan.

Just because Aflac's headline numbers were fairly in line with expectations, however, doesn't mean there weren't some important things going on with this insurance provider beneath the surface. After going through the conference call transcript provided by S&P Global Market Intelligence, three things in particular stand out -- all of which should be taken as encouraging signs for current investors.

A man with a broken leg sitting on a couch and talking on the phone.

Got sick or hurt at work? Aflac provides insurance for that. Image source: Getty Images.

1. Are Aflac's insurance policies profitable?

The combined ratio is one of the most important metrics to take into account when looking at an insurance company. This formula measures the profitability of an insurance company's underwriting policies before investment income from the float is taken into account. The formula for combined ratio is:

Combined Ratio = (Losses + Expenses)/Earned Premiums

For Aflac, all applicable figures can be found on its 10-Q filing with the SEC (found via the company's investor relations page). For the numerator, we'll add Aflac's "Benefit and claims, net" to "Total acquisition and operating expenses." We'll find the denominator by adding the net premiums for Aflac Japan and Aflac U.S., from page 14 of the 10-Q.

In other words, when calculating this ratio specifically for Aflac, the formula looks like:

(Benefits and claims, net + Total acquisition and operating expenses)/(Aflac Japan net premium + Aflac U.S. net premium)

When we plug in this quarter's numbers, we get (all numbers in millions):

(3083+1348)/(3200+1393) = 4431/4593 = 0.96

This is exactly what investors want to see. A combined ratio under 1.0 signifies the insurance company is making profits on its underwriting policies before its investment income from the float is considered.

2. Differentiated products leading to differentiated returns

One of the most encouraging signs from Aflac's quarter for investors was that new U.S. annualized premium sales increased by 7.5% over 2016's third quarter. When highlighting this growth during the conference call, CEO Daniel Amos stated:

It is exciting to see our platform investment pay off not just in sales, but also in customer satisfaction. It's also energizing to see surveys that indicate that 95% of our policyholders who use One Day Pay are likely to refer other people to Aflac. This demonstrates that One Day Pay is not only a fast claims initiative, it's a way of doing business that helps set our brand apart. Independent research continues to show that there is no doubt American consumers need cash quickly, and paying claims fast and fairly distinguishes us from the competition.

Keeping 95% of customers happy enough to have them refer the company to a friend is a great sign that the company's success can be sustainable for a long time yet to come. Paying claims fast, without a lot of hassle or inconvenience for the customer, is undoubtedly one of the best ways for Aflac to accomplish this.

3. Looking out for the shareholders

This quarter, Aflac's management continued its shareholder-friendly policies of buying back shares and increasing its dividend. The company repurchased approximately $219 million of stock in the third quarter and expects to repurchase a total of $1.3 billion to $1.5 billion worth of shares in all of 2017.

To no one's surprise, Aflac also announced a dividend increase for the 35th consecutive year this quarter, keeping Aflac's membership in the elite Dividend Aristocrat club intact. This quarter, Aflac raised its dividend by 4.7%. Amos added, "Our dividend policy is guided by growth in operating earnings per share along with free cash flow generation and capital quality."

With an annual dividend now of $1.80 and earnings per share over the last 12 months of $6.86, Aflac's payout ratio remains a modest 26.2%.

Keep an eye on Aflac

Shareholders understand that Aflac will never be the next hot stock or big thing. Nobody will ever make up a nifty-sounding investing acronym with an "A" for Aflac. But steady, compounding returns from "boring" companies should never be underestimated. As long as Aflac keeps underwriting profitable insurance policies, offers products that differentiate it from the competition, and returns gobs of money to shareholders via buybacks and dividends, investors in this company will probably see more market-beating returns for years to come.

More From The Motley Fool

Matthew Cochrane owns shares of Aflac. The Motley Fool recommends Aflac. The Motley Fool has a disclosure policy.

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