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Aflac's U.S. and Japan Business Poised for Strong Growth

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Aflac Inc. AFL looks well poised for growth on the back of its strong Japan and U.S. business.

One of the major steps toward streamlining its Japan business was branch conversion. Earlier during the year, Aflac completed its conversion of the Japan branch operations to a subsidiary. The conversion provides greater legal and regulatory transparency, as well as enhances business development opportunities, reduces strategic risk and improves cash flows and capital management within the organizational structure.

Moreover, Aflac’s business from Japan, which was suffering from low interest rates, is seeing a reversal this year. For the first half of 2018, revenues grew 2.1%. In an effort to mitigate headwinds relating to low interest rates in Japan, the company emphasized selling of third sector products and decrease exposure to first sector products (more interest sensitive).

This has led to a decline in the company’s business risk profile and increase in third-sector premium. Aflac’s introduction of new cancer product also aided sales growth in the Japan business.  Its strong and wide distribution network, which includes Japan’s post offices and traditional agencies, also acted as a catalyst to sales growth in the first half and the momentum is expected to continue in the second half, thereby aid the segment’s top line.

Aflac’s U.S. business, continues to perform strongly as evident from a revenue CAGR of 3% from 2008-2017, which continued through the first half of 2018 with revenues up 2.4%. The company has undertaken a number of growth initiatives in this segment such as the adoption of Everwell and One Pay Day for increased penetration, delivery of value-added services and increased client retention; product partnering to drive improved account values and employee access; and investment in administrative capabilities. These initiatives should drive top-line growth. In 2018, the company’s sales growth of 3% to 5% is expected to result in 2% to 3% growth in earned premium.

The company also stands to gain from the reduction in tax rates. Aflac will invest $250 million in different areas such as employee welfare and business growth, and provide support to childhood cancer initiatives. This development follows the recent passage of the tax reform by Donald Trump, which cuts the corporate tax rate to 21% from 35%. Per management, this easy tax regime provides an opportunity to make investments that will further drive business growth.

Aflac continues to maintain strong risk-adjusted capital at its operating subsidiaries, supported by consistent earnings and good liquidity. The company also has a strong capital management strategy in place.

In the first quarter of 2018, the company hiked its quarterly dividend by 15.6%, marking the 36th consecutive raise. The company expects repurchasing shares in the range of $1.1 million to $1.4 billion and deploy approximately $2.1 billion to $2.4 billion of capital in 2018. Leverage remains at the low end of its policy range of 20% to 25%. The company’s strong capital position cements shareholders’ confidence.

Shares of the company have gained 14.2% in a year’s time, outperforming the industry’s growth of 6.6%. Given the strong operating fundamentals, we expect the stock to see continued rally in the coming quarters.  

Aflac carries a Zacks Rank #2 (Buy). Other top-ranked stocks include Arch Capital Group Ltd.  ACGL, American Financial Group Inc. AFG and Berkshire Hathaway Inc. BRK.B, each carrying the same Zacks Rank as Aflac Inc.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Arch Capital provides property, casualty and mortgage insurance and reinsurance products worldwide. It delivered a positive surprise of 13.46% in the earlier reported quarter.

American Financial Group provides property and casualty insurance products in the United States. In the last reported quarter, it pulled off an earnings surprise of 8.51%.

Berkshire Hathaway engages in insurance, freight rail transportation and utility businesses. It came up with a 22.91% beat in the previously reported quarter.

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