Aflac

The lucrative business of supplemental insurance

Insurance agents don't have a great reputation in Germany. And yet 25% of all new insurance policies are sold through an agent - customers simply prefer personal advice. Some types of insurance really everyone should have, such as personal liability insurance or, for homeowners, household contents insurance. But there are also much more specialized policies, like hospital, dental, or cancer insurance.

Today let's take a look at an insurance company that has mastered the supplemental insurance business and doesn't even need to rely on insurance agents to do it. Aflac noticed early on that insurance agents weren't exactly popular, and for that reason it set up sales partnerships with the HR departments of large companies.

The history and business model of Aflac Inc.

In 1955, the three brothers John, Bill, and Paul Amos moved from the Florida coast to the neighboring state of Georgia. More precisely, to the city of Columbus, to found their own insurance company there. They chose the location because Columbus was the largest city in the southeastern US that didn't yet have an insurer of its own. However, the Amos brothers had never had anything to do with the insurance industry before, so they were, in a sense, diving into the unknown. On November 17, 1955, they founded the American Family Life Insurance Company. They rented a few offices and hired 60 insurance agents who went door to door selling life insurance. Business was great, and in its very first year the young company managed to sell 6,400 policies. The three brothers always kept an ear to their customers and listened to their needs. They saw the heavy financial burden of a cancer diagnosis and responded in 1958 with the first cancer insurance on the market. Customers pay a monthly amount, and if they get cancer, the insurer covers part of the treatment costs. The new supplemental policies became a bestseller.

As early as 1964, the brothers rethought the insurance agent concept, since they noticed that agents weren't particularly well regarded. They decided to partner with the HR departments of large companies. Now employers offered cancer insurance to their employees. If they signed up, the amount was simply deducted from their paycheck. With this simple but brilliant concept, the company was able to grow much faster. Around this time it also changed its name from Insurance to Assurance; this name was later abbreviated, and Aflac was born.

In 1970, John Amos visited the World Expo in Osaka, Japan. He was so taken with the country that four years later he became one of the first American insurers to venture into Japan. Americans didn't have it easy there after World War II, and yet their policies practically sold themselves. In its very first year, Aflac booked $25 million in premiums. After the turn of the millennium, Aflac became very well known thanks to a white duck in numerous ad campaigns. Besides HR departments, the company now also partners with banks and post offices - and that works so well that it already generates 70% of its revenue in Japan. Aflac has managed to position itself perfectly in the market with life insurance and various supplemental policies, and to hold its ground for the long term.

What are Aflac's plans for the future?

The insurer's executives certainly won't reinvent the wheel going forward, but you can still assume they'll keep listening to their customers' needs and offer matching insurance solutions. And even without innovation, the business will keep running steadily. One trend that Aflac surely won't be happy about, though, is Japan's ongoing population decline. But even that is far from a reason to worry, since the country is currently "shrinking" by just 0.12% per year. So the company will keep earning very good money from its existing policies for decades to come.

Aflac has come under criticism more often lately because of problems at its partner Japan Post Holding. Some customers were given bad advice and sold the wrong policies. Some customers were even mistakenly charged their premium twice, which of course caused unrest. Currently around 287,000 individual policies have to be reviewed manually to fix the errors. The cause of the problem is said to have been an out-of-sync IT system at the post offices. Everything is supposed to be back on track by October. With headlines like these, it's of course no surprise that new customers hold back for a while. Aflac clearly felt that in its last quarterly report, but it expects things to normalize again soon. The company is currently doing everything it can to win back the customer trust it lost.

And what about the dividend?

Here Aflac is a great showcase company. It has paid a dividend to its shareholders since 1973. Since 1983, it has even raised it year after year. And by an average of 7% (average of the last 10 years) - which makes the current dividend yield of 2.2% seem not so low after all. And with a payout ratio of just 26%, nothing stands in the way of further increases in the future either. Naturally, the company is one of the highly coveted Dividend Aristocrats.

Conclusion:
Aflac has built a strong distribution network that many other insurers would envy. It generates most of its revenue in Japan, where it works closely with the post office, banks, and the HR departments of large companies. We can't buy an Aflac policy of our own in Germany yet, but we can easily share in the company's success.