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Riding the storm out. That's what AFLAC Incorporated found itself effectively doing as it weathered Japan's prolonged recession and weakened yen on its way to a sales recovery and record results. It is the largest foreign insurance company operating in the increasingly competitive Japanese market based on premiums and profits, with an emphasis on supplemental cancer insurance. A survey by the Nihon Keizai newspaper found that AFLAC had the highest name recognition among any foreign financial services company operating in Japan, while Nikkei Business magazine named it the safest insurer among the nineteen largest insurance companies in Japan.
In the United States, expansion of AFLAC's product line beyond solely cancer coverage, greater nationwide marketing efforts, and inroads into the California and New York insurance markets have combined to boost its prospects for premium growth. Due to the fact that it has handily outperformed the stock market averages in most years, this well-managed company with a solid franchise and aggressive stock repurchase program was the most popular stock held by members of the National Association of Investors Corporation investment clubs in 1999. It was also the top insurance firm in Fortune magazine's annual list of the "100 Best Places to Work in America."
Men in the United States have a one-in-two lifetime risk of getting cancer, while women have a one-in-three risk. Overall cancer expenses are estimated at more than $100 billion, two thirds of which are indirect expenses. That health concern is why AFLAC Inc. and its primary subsidiary, American Family Life Assurance Company ofColumbus, successfully sell supplemental medical insurance policies that cover special conditions, primarily cancer.
Cancer and other insurance needs aren't just an American preoccupation, which is why AFLAC targets both the United States and Japan as the world's best insurance markets. Japan is by far the largest life insurance market in the world, with more than $20 trillion of life insurance in force, while the United States ranks as the second largest, with nearly $12 trillion in force. Together, these two markets are more than four times the combined size of the next ten largest markets.
Consumers in both markets face rising out-of-pocket health care expenses.
They may have access to insurance at their place of employment but they have the income to purchase additional insurance, and there are millions of consumers who don't yet own supplemental insurance. AFLAC pays cash benefits for intensive care, long-term (nursing home) care, in-home care, or as a Medicare supplement. AFLAC is the largest seller of supplemental insurance in the United States and the leading cancer-expense insurance company in Japan, which accounts for more than 80 percent of company sales. Its Japanese sales are based on the agency system, in which a company forms a subsidiary to sell AFLAC's insurance to employees. It sells primarily through the workplace in the United States as well, with employers deducting premiums from paychecks. Hospital intensive care, home health care, accident, and disability, Medicare supplemental, and long-term care protection are among its supplemental offerings. With 35,000 licensed agents, AFLAC sells its products through more than 120,000 U.S. payroll groups, making it the number one company in payroll marketing.
Founded in 1955 by brothers John, Paul, and Bill Amos, AFLAC introduced one of the world's first cancer expense insurance policies in 1958. It initially operated in Georgia and Alabama, but by the mid-1960s had expanded across the Southeast. The company continued its domestic expansion throughout the 1970s and 1980s, and now operates in all fifty states. In 1974 AFLAC became the second foreign company licensed to sell insurance products in Japan. Today it is the largest foreign insurer in Japan in terms of premium income and one of the most successful foreign companies operating in any industry there. AFLAC insures nearly one fourth of Japan's total population, about thirty million people. More than 97 percent of the companies on the Tokyo Stock Exchange now offer AFLAC products to their employees or customers.
Rather than retrench during Japan's economic downturn, the company expanded its product line to sell new 'Rider MAX' riders to its cancer life policy that include surgical benefits, accident coverage, and medical/sickness benefits. The Japanese policy renewal rate is an impressive 97 percent.
"We are continually preparing for a more competitive Japanese market as deregulation approaches in 2001, and we believe we are ready to meet the challenges and opportunities of a rapidly changing market," AFLAC President and Chief Executive Officer Daniel Amos stated in the company's most recent annual report, referring to the complete deregulation of the Japanese insurance industry which takes effect on January 1, 2001. "We have also established a momentum in the United States that is building on itself. Ultimately, the reason we have been able to build momentum is that there is a sizable market of American workers who can benefit from voluntary supplemental insurance products sold at the work site."
All of AFLAC Japan's premiums and claims, and most of its investment income and expenses, are received or paid in yen. The majority of its invested assets are denominated in yen as well. Yet for financial reporting purposes, all yen results are translated into dollars, which affects reported earnings and balance sheets. The company doesn't hedge its earnings against yen exposure because it believes this would be hedging against a noneconomic event. The company does access the foreign-currency forward markets to maximize the dollar amount of its profit repatriation to the United States. In addition, AFLAC Japan's dollar-denominated investment portfolio and AFLAC Inc.'s yen-denominated borrowings act as a hedge of AFLAC Japan's equity.
In the past several years, AFLAC began strategically positioning to compete in a changing world insurance market. It began broadening its product line in the 1980s, after selling virtually one product for more than two decades. Newer products now account for 64 percent of new sales in the United States, with accident/disability coverage the company's best-selling U.S. policy. New products in Japan account for nearly one third of new sales. While AFLAC is continually assessing new markets, in recent years it has sold or closed operations in countries such as Canada that couldn't produce near-term, sustainable profitability. Because of product broadening and enhanced distribution systems, management believes the company's greatest opportunities for growth exist in its two primary markets, Japan and the United States. Both give the company plenty to keep it busy.